Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Force Majeure?

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

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

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

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

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

The Force Majeure Contract Clause

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

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

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

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

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

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

What is Hardship?

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

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

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

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

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

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

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

Is the Coronavirus a Force Majeure or Hardship event?

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

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

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

What is the event reported by the Supplier?

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

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

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

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

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

Did the Supplier provide evidence of Force Majeure?

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

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

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

Does the contract establish a Force Majeure or Hardship clause?

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

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

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

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

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

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

What does the law applicable to the Contract establish?

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

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

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

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

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

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

How to limit supply chain risks?

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

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

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

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

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

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

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

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

The Agreement has four main characteristics:

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

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

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

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

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

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

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

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

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

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

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

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

Practical Conclusions:

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

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

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

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

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

The signature of the contract

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

The proper choice of contract

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

Monitoring of legal and business relations

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

Evidences about customers

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

Evidences on purchases and sales

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

Damages in case of termination of contracts

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

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Force Majeure?

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

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

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

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

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

The Force Majeure Contract Clause

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

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

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

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

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

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

What is Hardship?

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

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

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

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

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

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

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

Is the Coronavirus a Force Majeure or Hardship event?

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

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

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

What is the event reported by the Supplier?

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

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

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

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

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

Did the Supplier provide evidence of Force Majeure?

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

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

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

Does the contract establish a Force Majeure or Hardship clause?

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

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

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

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

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

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

What does the law applicable to the Contract establish?

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

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

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

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

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

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

How to limit supply chain risks?

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

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

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

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

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

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

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

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

The Agreement has four main characteristics:

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

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

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

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

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

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

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

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

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

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

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

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

Practical Conclusions:

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

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

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

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

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

The signature of the contract

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

The proper choice of contract

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

Monitoring of legal and business relations

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

Evidences about customers

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

Evidences on purchases and sales

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

Damages in case of termination of contracts

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

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Force Majeure?

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

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

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

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

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

The Force Majeure Contract Clause

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

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

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

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

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

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

What is Hardship?

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

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

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

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

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

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

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

Is the Coronavirus a Force Majeure or Hardship event?

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

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

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

What is the event reported by the Supplier?

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

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

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

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

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

Did the Supplier provide evidence of Force Majeure?

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

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

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

Does the contract establish a Force Majeure or Hardship clause?

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

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

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

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

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

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

What does the law applicable to the Contract establish?

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

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

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

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

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

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

How to limit supply chain risks?

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

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

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

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

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

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

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

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

The Agreement has four main characteristics:

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

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

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

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

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

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

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

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

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

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

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

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

Practical Conclusions:

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

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

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

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

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

The signature of the contract

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

The proper choice of contract

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

Monitoring of legal and business relations

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

Evidences about customers

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

Evidences on purchases and sales

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

Damages in case of termination of contracts

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

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Force Majeure?

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

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

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

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

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

The Force Majeure Contract Clause

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

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

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

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

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

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

What is Hardship?

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

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

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

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

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

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

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

Is the Coronavirus a Force Majeure or Hardship event?

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

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

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

What is the event reported by the Supplier?

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

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

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

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

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

Did the Supplier provide evidence of Force Majeure?

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

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

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

Does the contract establish a Force Majeure or Hardship clause?

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

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

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

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

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

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

What does the law applicable to the Contract establish?

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

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

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

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

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

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

How to limit supply chain risks?

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

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

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

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

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

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

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

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

The Agreement has four main characteristics:

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

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

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

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

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

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

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

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

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

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

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

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

Practical Conclusions:

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

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

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

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

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

The signature of the contract

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

The proper choice of contract

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

Monitoring of legal and business relations

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

Evidences about customers

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

Evidences on purchases and sales

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

Damages in case of termination of contracts

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

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Force Majeure?

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

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

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

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

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

The Force Majeure Contract Clause

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

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

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

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

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

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

What is Hardship?

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

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

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

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

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

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

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

Is the Coronavirus a Force Majeure or Hardship event?

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

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

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

What is the event reported by the Supplier?

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

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

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

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

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

Did the Supplier provide evidence of Force Majeure?

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

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

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

Does the contract establish a Force Majeure or Hardship clause?

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

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

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

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

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

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

What does the law applicable to the Contract establish?

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

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

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

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

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

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

How to limit supply chain risks?

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

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

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

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

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

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

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

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

The Agreement has four main characteristics:

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

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

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

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

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

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

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

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

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

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

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

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

Practical Conclusions:

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

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

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

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

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

The signature of the contract

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

The proper choice of contract

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

Monitoring of legal and business relations

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

Evidences about customers

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

Evidences on purchases and sales

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

Damages in case of termination of contracts

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

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is Force Majeure?

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

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

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

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

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

The Force Majeure Contract Clause

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

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

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

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

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

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

What is Hardship?

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

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

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

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

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

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

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

Is the Coronavirus a Force Majeure or Hardship event?

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

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

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

What is the event reported by the Supplier?

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

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

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

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

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

Did the Supplier provide evidence of Force Majeure?

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

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

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

Does the contract establish a Force Majeure or Hardship clause?

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

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

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

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

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

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

What does the law applicable to the Contract establish?

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

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

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

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

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

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

How to limit supply chain risks?

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

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

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

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

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

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

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

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

The Agreement has four main characteristics:

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

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

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

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

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

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

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

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

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

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

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

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

Practical Conclusions:

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

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

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

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

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

The signature of the contract

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

The proper choice of contract

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

Monitoring of legal and business relations

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

Evidences about customers

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

Evidences on purchases and sales

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

Damages in case of termination of contracts

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

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

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

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

What I am talking about in this article:

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

What is a framework supply agreement?

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

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

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

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

What is the function of the framework supply agreement?

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

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

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

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

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

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

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

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

When is it important to conclude a purchase framework agreement?

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

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

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

When is it helpful to conclude a sales framework agreement?

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

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

What is the content of the supply framework agreement?

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

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

The most important clauses are:

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

How to handle price revision in a supply contract?

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

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

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

How to manage delivery terms in a supply agreement?

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

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

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

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

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

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

The Force Majeure clause in international sales contracts

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

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

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

Applicable law and dispute resolution clauses

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

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

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

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

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

Topics covered

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

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

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

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

The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

What is Force Majeure?

At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

The Force Majeure Contract Clause

The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

• Give prompt notice to the other parties of the impediment;
• In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
• In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
• In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
• In the event of termination of the contract, return any service received or an amount of equivalent value.

Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

What is Hardship?

Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

• The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
• The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

Is the Coronavirus a Force Majeure or Hardship event?

Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

• The factual situation: what is the event reported by the Supplier?
• Has the party invoking Force Majeure proven that the requirements exist?
• What does the Contract (and/or the General Conditions of Contract) provide for?
• What does the law applicable to the Contract establish?
• What are the consequences on the obligations of the Parties?

What is the event reported by the Supplier?

As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

Did the Supplier provide evidence of Force Majeure?

The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

Does the contract establish a Force Majeure or Hardship clause?

The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

Finally, it is still necessary to verify what is established by the law applicable to the contract.

What does the law applicable to the Contract establish?

The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

How to limit supply chain risks?

The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

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On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

The Agreement has four main characteristics:

1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
2. Promotes innovation, productivity and competition;
3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

“a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

(cf. the CJEU’s press release No. 132/2017).

This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

Practical Conclusions:

1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
5. For details on distribution networks and distribution online, please see my articles

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

The signature of the contract

Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

The proper choice of contract

If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

Monitoring of legal and business relations

If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

Evidences about customers

In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

Evidences on purchases and sales

Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

Damages in case of termination of contracts

Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

What I am talking about in this article:

• What is the supply framework agreement?
• What is the function of the supply framework agreement?
• The difference with the general conditions of sale or purchase
• When to enter a purchase framework agreement?
• When is it beneficial to conclude a sales framework agreement?
• The content of the supply framework agreement
• Price revision clause and hardship
• Delivery terms in the supply framework agreement
• The Force Majeure clause in international sales contracts
• International sales: applicable law and dispute resolution arrangements

What is a framework supply agreement?

It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

What is the function of the framework supply agreement?

It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

What is the difference between a purchase or sales framework agreement and the general terms and conditions?

Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

When is it important to conclude a purchase framework agreement?

It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

When is it helpful to conclude a sales framework agreement?

This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

What is the content of the supply framework agreement?

There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

The most important clauses are:

• the identification of products and technical specifications (often identified in an annex)
• the minimum/maximum volume of supplies
• the possible obligation to purchase/sell a minimum/maximum volume of products
• the schedule of supplies
• the delivery times
• the determination of the price and the conditions for its possible modification (see also the next paragraph)
• impediments to performance (Force Majeure)
• cases of Hardship
• penalties for delay or non-performance or for failure to achieve the agreed volumes
• the hierarchy between the framework agreement and the orders and any other contracts between the parties
• applicable law and dispute resolution (especially in international agreements)

How to handle price revision in a supply contract?

A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

How to manage delivery terms in a supply agreement?

Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

The Force Majeure clause in international sales contracts

A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

Applicable law and dispute resolution clauses

Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

Topics covered

• The impact of Coronavirus (Covid-19) on the international Supply chain
• What is Force Majeure?
• The Force Majeure Contract Clause
• What is Hardship?
• Is the Coronavirus a Force Majeure or Hardship event?
• What is the event reported by the Supplier?
• Did the Supplier provide evidence of Force Majeure?
• Does the contract establish a Force Majeure or Hardship clause?
• What does the law applicable to the Contract establish?
• How to limit supply chain risks?

The impact of Coronavirus (Covid-19) on the international Supply chain

Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

What is Force Majeure?

At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

The Force Majeure Contract Clause

The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

• Give prompt notice to the other parties of the impediment;
• In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
• In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
• In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
• In the event of termination of the contract, return any service received or an amount of equivalent value.

Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

What is Hardship?

Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

• The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
• The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

Is the Coronavirus a Force Majeure or Hardship event?

Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

• The factual situation: what is the event reported by the Supplier?
• Has the party invoking Force Majeure proven that the requirements exist?
• What does the Contract (and/or the General Conditions of Contract) provide for?
• What does the law applicable to the Contract establish?
• What are the consequences on the obligations of the Parties?

What is the event reported by the Supplier?

As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

Did the Supplier provide evidence of Force Majeure?

The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

Does the contract establish a Force Majeure or Hardship clause?

The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

Finally, it is still necessary to verify what is established by the law applicable to the contract.

What does the law applicable to the Contract establish?

The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

How to limit supply chain risks?

The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

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On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

The Agreement has four main characteristics:

1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
2. Promotes innovation, productivity and competition;
3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

“a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

(cf. the CJEU’s press release No. 132/2017).

This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

Practical Conclusions:

1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
5. For details on distribution networks and distribution online, please see my articles

• “Internetvertrieb in der EU 2018 ff. – Online-Vertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht2017, 274-281: and
• „Plattformverbote im Selektivvertrieb – der EuGH-Vorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016,278–283.

The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

The signature of the contract

Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

The proper choice of contract

If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

Monitoring of legal and business relations

If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

Evidences about customers

In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

Evidences on purchases and sales

Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

Damages in case of termination of contracts

Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

With the recent sentence n° 16601/2017 the Italian Supreme Court (“Corte di Cassazione”) – changing its jurisprudence – opened to the possibility of recognizing in Italy foreign judgments containing punitive damages. In this post we will see what these punitive damages are about, under which conditions they will be recognized and enforced in Italy and, above all, which countermeasures may be implemented to deal with these new risks.

Punitive damages are a monetary compensation – typical of common law legal systems – awarded to an injured party that goes beyond what is necessary to compensate the individual for losses. Normally punitive damages are imposed when the person who caused the damage acted with wilful misconduct and gross negligence.

With punitive damages, other than the compensatory function, the reimbursement of damages assumes also a sanctioning purpose, typical of criminal law, also acting like a deterrent towards other potential lawbreakers.

In the legal systems that provide for punitive damages, the recognition and the quantification of the highest compensation, most of the time, are delegated to the Judge.

In the United States of America punitive damages are a settled principle of common law, but ruled in different ways for each State. However, generally, they are applied when the conduct of person who caused the damage was intentionally directed to cause damage or is put in place without regard to the protection and safety standards. Usually they cannot be awarded for breach of contract, unless it also leads to an independent tort.

Historically, in Italy, punitive damages generally were not recognized, because the sanctioning purpose is not consistent with the civil law principles, anchored to the concept that the reimbursement of the damage is a simple restoration of financial heritage of the damaged person.

Therefore, the recognition of punitive damage established by a foreign judgment was normally denied due to a violation of the public policy (“ordre public”), so those judgments did not have access to the Italian legal system.

The sentence n° 16601/2017 of the 5 July 2017 of the Joint Sessions of Italian Supreme Court (“Sezioni Unite della Corte di Cassazione”) however, changed the cards on the table. In this particular case, the plaintiff applied to the Venice Court of Appeal for the recognition (pursuant to art. 64, law 218/1995) of three judgments of District Court of Appeal of the State of Florida that, accepting a guarantee call submitted by an American retailer of helmets against the Italian company, condemned this latter to pay 1.436.136,87 USD (in addition to legal expenses and interests) for the damages caused by a defect in the helmet used in occasion of the accident.

The Venice Court of Appeal recognized the foreign judgment, considering the abovementioned sum merely as compensation for damages and not as punitive damages. This decision was challenged by the unsuccessful Italian party before the Italian Supreme Court, arguing the violation of the Italian ordre public by the US judgment, on the basis of a consolidated juridical opinion until that day.

The Supreme Court of Cassation confirmed the Venice Court assessment, considering the sum non-punitive and recognized the US judgment in Italy.

The Supreme Court, though, took the opportunity to address the question of the admissibility of punitive damages in Italy, changing the previous orientation (see Cass. 1781/2012).

According to the Court, the concept of civil liability as mere compensation of the damage suffered is to be considered obsolete, given the evolution of this institute through national and European legislation and case-law that introduced civil remedies intended to punish the wrongdoer. As a matter of fact, in our system, it’s possible to find several cases of damages with sanctioning function: in the matter of libel by press (art. 12 L. 47/48), copyright (art. 158 L. 633/41), industrial property (art. 125 D. Lgs. 30/2005), abuse of process (art. 96 comma 3 c.p.c. e art. 26 comma 2 c.p.a.), labour law (art. 18, comma 14), family law (art. 709-ter c.p.c.) and others.

The Supreme Court has, therefore, stated the following principle: “Under Italian law, civil liability is aimed not only to compensate for losses incurred by the injured party, but also to reform the defendant and others from engaging in conduct similar. Therefore, the US legal institute of punitive damages is not incompatible with the Italian legal system”.

The important consequence is that this decision opens the door to possible recognition of foreign sentences that condemn a party to pay a sum higher than the amount sufficient to compensate the suffered injury as a result of the damage.

To that end, however, the Supreme Court has set certain conditions so that foreign sentences have validity, that is to say that the decision is made in foreign law system on a normative basis that:

1. Clearly establish the cases in which it is possible to convict a party to pay punitive damages; and
2. The predictability of it; and
3. Establish quantitative limits.

It has to be clarified that the sentence has not modified the Italian system of civil liability. In other words, the sentence will not allow Italian Judges to establish punitive damages under Italian law.

As for foreign court decisions, it will be now possible to obtain a compensation for punitive damages through the recognition and enforcement of a foreign judgment, as long as they respect the above requirements.

Extending our view beyond the Italian borders, we notice that punitive damages are alien to the legal tradition of most of  European States: there is the possibility, though, that other Courts of continental Europe might follow the decision of the Italian Supreme Court and recognize foreign judgments which grant punitive damages.

How to prevent this new risk

There are several measures which businessmen can adopt to mitigate this new risk: firstly the adoption of contractual clauses that exclude this kind of damages or establish a cap on the amount of the contractual damages which can be claimed, for example by limiting the value of damages at the price of the products or services provided.

Furthermore, it’s very important to have an overall knowledge of the legislation and case law of the markets in which the enterprise operates, even indirectly (for example: with the commercial distribution of products) in order to choose consciously the applicable law to the contract and the dispute resolution methods (for example: establishing the jurisdiction in a country that does not provide for punitive damages).

Finally, this type of liability and risk may also be covered by a product liability insurance.

[Initial note: This article is not aimed as a political article pro or con boycott movements or the Israeli government, but rather as a legal informative overview, in light of the actual and financial impact or exposure international business may have in the referred to matter.]

It is perhaps not known to many international trading players, but under Israeli law, Bill for prevention of damage to the State of Israel through boycott – 2011, affirmed by the Supreme Court in 2015 (after a slight interpretive adjustment), boycotting Israeli origin products, or deliberate avoidance of economic or academic ties, may give rise to a lawsuit for actual damages under civil law.

In light of the international BDS movement, attempting to place pressure upon the State of Israel by means of economic and cultural pressure, Israel has realized such activity, indeed, causes actual harm and damage to Israeli based business, manufacturers, importers/exporters, etc., as well as to academic students and professors, and so on, in cultural ties of many sorts – just because the origin is Israel.

This boycott movement affects the people and businesses of Israel, as opposed to  Israeli leaders or politicians or  the State of Israel as a state, and conveys questionable (to say the least) economic and cultural negative effects upon the people facing unprecedented obstacles in trade in the international arena – for no wrongdoing on their part.

Regardless of the political opinion one may have concerning the legitimacy, or rather the non-legitimacy, of the BDS movement or concerning the current political policy of the State of Israel – the relatively new law provides actual legal tools to deal with negative economic outcomes (damages, loss of profits, etc.) that businesses or private people encounter or suffer from boycott measures, solely because of their affiliation or relation to the State of Israel.

Regardless of any opinion of the act itself or its enactment, at the end of the day the act exists and may be used and exploited by filing civil lawsuits against anyone who called for or participated in a boycott. In that sense it creates a new civil wrong as part of the Israeli tort laws.

Moreover, even a deliberate avoidance of economic, cultural or academic ties can raise liability for the avoider towards the business or ties avoided, as well as liability for anyone who has called for the boycott or publicly expressed support of it.

The law goes even further – and also excludes the defense argument of “sufficient justification” and thus provides that anyone who has caused or led to a breach of a contract, by calling for a boycott, may be liable for damages, as well.

As for the damages that can be claimed, after the adjustment to the law according to the Supreme Court ruling of 2015 (ruling that compensation must be awarded in correspondence with the actual damages or loss of profit caused, and cancelled the clause for penal compensation) – the entity that may sue for torts is the entity that suffered the damage and what can be sued for is the actual damage according to the regular Israeli torts law.

The law also prohibits a person who calls for a boycott from participating in any public tender, but this is a different focus from the side of the state.

It is worth mentioning  that the rationale for this legislation was also reviewed by the widely respected Israeli Supreme Court, that has strongly elaborated that such legislation is constitutional and, inter alia, that international entities and individuals such as the BDS movement (as opposed perhaps to states) should not be able to harm or interfere with international or domestic economic affairs without at least being accountable for the outcome of such, and that freedom of speech cannot be unlimitedly protected when it in fact calls for action (or for refraining from action)  that has an actual impact on another and is not simply an expression of an opinion.

To date, it seems that the Magistrates and District Courts of Israel have yet to render judgments in actual cases based on the boycott act, indicating that the implementation of the act is still inchoate. However, it seems that instances and measures of boycotting are on the rise and the methods of boycotting are becoming increasingly overt, in a manner that is bound to lead to considerable litigation in the near future.

Needless to say, issues of jurisdiction, and other aspects of private international law, or imposing jurisdiction on foreign players, are also yet to be resolved in reference to the emergence of lawsuits under the boycott law, but these will surely find their creative legal solutions with the actual submission of lawsuits concerning real life cases.

Summary

The framework supply contract is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier) that take place over a certain period of time. This agreement determines the main elements of future contracts such as price, product volumes, delivery terms, technical or quality specifications, and the duration of the agreement.

The framework contract is useful for ensuring continuity of supply from one or more suppliers of a certain product that is essential for planning industrial or commercial activity. While the general terms and conditions of purchase or sale are the rules that apply to all suppliers or customers of the company. The framework contract is advisable to be concluded with essential suppliers for the continuity of business activity, in general or in relation to a particular project.

What I am talking about in this article:

• What is the supply framework agreement?
• What is the function of the supply framework agreement?
• The difference with the general conditions of sale or purchase
• When to enter a purchase framework agreement?
• When is it beneficial to conclude a sales framework agreement?
• The content of the supply framework agreement
• Price revision clause and hardship
• Delivery terms in the supply framework agreement
• The Force Majeure clause in international sales contracts
• International sales: applicable law and dispute resolution arrangements

What is a framework supply agreement?

It is an agreement that regulates a series of future sales and purchases between two parties (customer and supplier), which will take place over a certain period.

It is therefore referred to as a “framework agreement” because it is an agreement that establishes the rules of a future series of sales and purchase contracts, determining their primary elements (such as the price, the volumes of products to be sold and purchased, the delivery terms of the products, and the duration of the contract).

After concluding the framework agreement, the parties will exchange orders and order confirmations, entering a series of autonomous sales contracts without re-discussing the covenants already defined in the framework agreement.

Depending on one’s point of view, this agreement is also called a sales framework agreement (if the seller/supplier uses it) or a purchasing framework agreement (if the customer proposes it).

What is the function of the framework supply agreement?

It is helpful to arrange a framework agreement in all cases where the parties intend to proceed with a series of purchases/sales of products over time and are interested in giving stability to the commercial agreement by determining its main elements.

In particular, the purchase framework agreement may be helpful to a company that wishes to ensure continuity of supply from one or more suppliers of a specific product that is essential for planning its industrial or commercial activity (raw material, semi-finished product, component).

By concluding the framework agreement, the company can obtain, for example, a commitment from the supplier to supply a particular minimum volume of products, at a specific price, with agreed terms and technical specifications, for a certain period.

This agreement is also beneficial, at the same time, to the seller/supplier, which can plan sales for that period and organize, in turn, the supply chain that enables it to procure the raw materials and components necessary to produce the products.

What is the difference between a purchase or sales framework agreement and the general terms and conditions?

Whereas the framework agreement is an agreement that is used with one or more suppliers for a specific product and a certain time frame, determining the essential elements of future contracts, the general purchase (or sales) conditions are the rules that apply to all the company’s suppliers (or customers).

The first agreement, therefore, is negotiated and defined on a case-by-case basis. At the same time, the general conditions are prepared unilaterally by the company, and the customers or suppliers (depending on whether they are sales or purchase conditions) adhere to and accept that the general conditions apply to the individual order and/or future contracts.

The two agreements might also co-exist: in that case; it is a good idea to specify which contract should prevail in the event of a discrepancy between the different provisions (usually, this hierarchy is envisaged, ranging from the special to the general: order – order confirmation; framework agreement; general terms and conditions of purchase).

When is it important to conclude a purchase framework agreement?

It is beneficial to conclude this agreement when dealing with a mono-supplier or a supplier that would be very difficult to replace if it stopped selling products to the purchasing company.

The risks one aims to avoid or diminish are so-called stock-outs, i.e., supply interruptions due to the supplier’s lack of availability of products or because the products are available, but the parties cannot agree on the delivery time or sales price.

Another result that can be achieved is to bind a strategic supplier for a certain period by agreeing that it will reserve an agreed share of production for the buyer on predetermined terms and conditions and avoid competition with offers from third parties interested in the products for the duration of the agreement.

When is it helpful to conclude a sales framework agreement?

This agreement allows the seller/supplier to plan sales to a particular customer and thus to plan and organize its production and logistical capacity for the agreed period, avoiding extra costs or delays.

Planning sales also makes it possible to correctly manage financial obligations and cash flows with a medium-term vision, harmonizing commitments and investments with the sales to one’s customers.

What is the content of the supply framework agreement?

There is no standard model of this agreement, which originated from business practice to meet the requirements indicated above.

Generally, the agreement provides for a fixed period (e.g., 12 months) in which the parties undertake to conclude a series of purchases and sales of products, determining the price and terms of supply and the main covenants of future sales contracts.

The most important clauses are:

• the identification of products and technical specifications (often identified in an annex)
• the minimum/maximum volume of supplies
• the possible obligation to purchase/sell a minimum/maximum volume of products
• the schedule of supplies
• the delivery times
• the determination of the price and the conditions for its possible modification (see also the next paragraph)
• impediments to performance (Force Majeure)
• cases of Hardship
• penalties for delay or non-performance or for failure to achieve the agreed volumes
• the hierarchy between the framework agreement and the orders and any other contracts between the parties
• applicable law and dispute resolution (especially in international agreements)

How to handle price revision in a supply contract?

A crucial clause, especially in times of strong fluctuations in the prices of raw materials, transport, and energy, is the price revision clause.

In the absence of an agreement on this issue, the parties bear the risk of a price increase by undertaking to respect the conditions initially agreed upon; except in exceptional cases (where the fluctuation is strong, affects a short period, and is caused by unforeseeable events), it isn’t straightforward to invoke the supervening excessive onerousness, which allows renegotiating the price, or the contract to be terminated.

To avoid the uncertainty generated by price fluctuations, it is advisable to agree in the contract on the mechanisms for revising the price (e.g., automatic indexing following the quotation of raw materials). The so-called Hardship or Excessive Onerousness clause establishes what price fluctuation limits are accepted by the parties and what happens if the variations go beyond these limits, providing for the obligation to renegotiate the price or the termination of the contract if no agreement is reached within a certain period.

How to manage delivery terms in a supply agreement?

Another fundamental pact in a medium to long-term supply relationship concerns delivery terms. In this case, it is necessary to reconcile the purchaser’s interest in respecting the agreed dates with the supplier’s interest in avoiding claims for damages in the event of a delay, especially in the case of sales requiring intercontinental transport.

The first thing to be clarified in this regard concerns the nature of delivery deadlines: are they essential or indicative? In the first case, the party affected has the right to terminate (i.e., wind up) the agreement in the event of non-compliance with the term; in the second case, due diligence, information, and timely notification of delays may be required, whereas termination is not a remedy that may be automatically invoked in the event of a delay.

A useful instrument in this regard is the penalty clause: with this covenant, it is established that for each day/week/month of delay, a sum of money is due by way of damages in favor of the party harmed by the delay.

If quantified correctly and not excessively, the penalty is helpful for both parties because it makes it possible to predict the damages that may be claimed for the delay, quantifying them in a fair and determined sum. Consequently, the seller is not exposed to claims for damages related to factors beyond his control. At the same time, the buyer can easily calculate the compensation for the delay without the need for further proof.

The same mechanism, among other things, may be adopted to govern the buyer’s delay in accepting delivery of the goods.

Finally, it is a good idea to specify the limit of the penalty (e.g.,10 percent of the price of the goods) and a maximum period of grace for the delay, beyond which the party concerned is entitled to terminate the contract by retaining the penalty.

The Force Majeure clause in international sales contracts

A situation that is often confused with excessive onerousness, but is, in fact, quite different, is that of Force Majeure, i.e., the supervening impossibility of performance of the contractual obligation due to any event beyond the reasonable control of the party affected, which could not have been reasonably foreseen and the effects of which cannot be overcome by reasonable efforts.

The function of this clause is to set forth clearly when the parties consider that Force Majeure may be invoked, what specific events are included (e.g., a lock-down of the production plant by order of the authority), and what are the consequences for the parties’ obligations (e.g., suspension of the obligation for a certain period, as long as the cause of impossibility of performance lasts, after which the party affected by performance may declare its intention to dissolve the contract).

If the wording of this clause is general (as is often the case), the risk is that it will be of little use; it is also advisable to check that the regulation of force majeure complies with the law applicable to the contract (here an in-depth analysis indicating the regime provided for by 42 national laws).

Applicable law and dispute resolution clauses

Suppose the customer or supplier is based abroad. In that case, several significant differences must be borne in mind: the first is the agreement’s language, which must be intelligible to the foreign party, therefore usually in English or another language familiar to the parties, possibly also in two languages with parallel text.

The second issue concerns the applicable law, which should be expressly indicated in the agreement. This subject matter is vast, and here we can say that the decision on the applicable law must be made on a case-by-case basis, intentionally: in fact, it is not always convenient to recall the application of the law of one’s own country.

In most international sales contracts, the 1980 Vienna Convention on the International Sale of Goods (“CISG”) applies, a uniform law that is balanced, clear, and easy to understand. Therefore, it is not advisable to exclude it.

Finally, in a supply framework agreement with an international supplier, it is important to identify the method of dispute resolution: no solution fits all. Choosing a country’s jurisdiction is not always the right decision (indeed, it can often prove counterproductive).

Summary – When can the Coronavirus emergency be invoked as a Force Majeure event to avoid contractual liability and compensation for damages? What are the effects on the international supply chain when a Chinese company fails to fulfill its obligations to supply or purchase raw materials, components, or products? What behaviors should foreign entrepreneurs adopt to limit the risks deriving from the interruption of supplies or purchases in the supply chain?

Topics covered

• The impact of Coronavirus (Covid-19) on the international Supply chain
• What is Force Majeure?
• The Force Majeure Contract Clause
• What is Hardship?
• Is the Coronavirus a Force Majeure or Hardship event?
• What is the event reported by the Supplier?
• Did the Supplier provide evidence of Force Majeure?
• Does the contract establish a Force Majeure or Hardship clause?
• What does the law applicable to the Contract establish?
• How to limit supply chain risks?

The impact of Coronavirus (Covid-19) on the international Supply chain

Coronavirus/Covid 19 has created terrible health and social emergencies in China, which have made exceptional measures of public order necessary for the containment of the virus, like quarantines, travel bans, the suspension of public and private events, and the closure of industrial plants, offices and commercial activities for a certain period of time.

Once the reopening of the plants was authorized, the return to normality was strongly slowed because many workers, who had traveled to other regions in China for the Lunar New Year holiday, did not return to their workplaces.

The current data on the reopening of the factories and the number of staff present are not unambiguous, and it is legitimate to doubt their reliability; therefore, it is not possible to predict when the emergency can be defined as having ended, or if and how Chinese companies will be able to fill the delays and production gaps that have been created.

Certainly, it is very probable that, in the coming months, foreign entrepreneurs will see their Chinese counterparts pleading the impossibility of fulfilling their contracts, with Coronavirus as the reason.

To understand the size of the problem, just consider that in the month of February 2020 alone, the China Council for the Promotion of International Trade (the Chinese Chamber of Commerce that is tasked with promoting international commerce) at the request of Chinese companies, has already issued 3,325 certificates attesting to the impossibility of fulfilling contractual obligations due to the Coronavirus epidemic, for a total value of more than 270 billion yuan (US $38.4 bn), according to the official Xinhua News Agency.

What risks does this situation pose for foreign entrepreneurs, and what consequences can it have beyond Chinese borders?

There are many risks, and the potential damages are enormous: China is the world’s factory, and it currently generates roughly 15% of the world’s GDP. Therefore, it is unlikely that a production chain in any industrial sector does not involve one or more Chinese companies as suppliers of raw materials, semi-finished materials, or components (in the case of Italy, the sectors most integrated with supply chains in China are the automotive, chemical, pharmaceutical, textile, electronic, and machinery sectors).

Failure to fulfill on the part of the Chinese may, therefore, result in a cascade of non-fulfillments of foreign entrepreneurs towards their end clients or towards the next link in the supply chain.

The fact that the virus is spreading rapidly (at the moment of publication of this article the situation is already critical in some regions in Italy (and in South Korea and Iran), and cases are beginning to be flagged in the USA) furthermore, makes it possible that production stops and quarantine situations similar to those described could also be adopted in regions and industrial sectors of other countries.

To simplify this picture, let us consider the case of a Chinese supplier (Party A) that supplies a component or performs a service for a foreign company (Party B), which in turn assembles (in China or abroad) the components into a semi-finished or final product, that is then resold to third parties (Party C).

If Party A is late or unable to deliver their product or service to Party B, they risk finding themselves exposed to risks of contract failure versus Party C, and so on along the supply/purchase chain.

Let’s examine how to handle the case in which Party A communicates that it has become impossible to fulfill the contract for reasons related to the Coronavirus emergency, such as in the case of an administrative measure to close the plant, the lack of staff in the factory on reopening, the impossibility of obtaining certain raw materials or components, the blocking of certain logistics services, etc.

In international trade, this situation, i.e. exemption from liability for non-fulfillment of contractual performance, which has become impossible due to events that have occurred outside the sphere of control of the Party, is generally defined as “Force Majeure”.

To understand when it is legitimate for a supplier to invoke the impossibility to fulfill a contract due to the Coronavirus and when instead these actions are unfounded or specious, we must ask ourselves when can Party A invoke Force Majeure and what can Party B do to limit damages and avoid being considered in-breach towards Party C.

What is Force Majeure?

At an international level, a unified concept of Force Majeure doesn’t exist because every different country has established their own specific regulations.

A useful reference is given by the 1980 Vienna Convention on Contracts for the International Sale of Goods (CISG), ratified by 93 countries (among which are Italy, China, the USA, Germany, France, Spain, Australia, Japan, and Mexico) and automatically applicable to sales between companies with seat in contracting states.

Art. 79 of CISG, titled, “Impediment Excusing Party from Damages”, provides that, “A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.”

The characteristics of the cause of exemption from liability for non-fulfillment are, therefore, its unpredictability, the fact that it is beyond the control of the Party, and the impossibility of taking reasonable steps to avoid or overcome it.

In order to establish, in concrete terms, if the conditions for a Force Majeure event exist, what its consequences are, and how the parties should conduct themselves, it is first necessary to analyze the content of the Force Majeure clause (if any) included in the contract.

The Force Majeure Contract Clause

The model Force Majeure clause used for reference in international commerce is the one prepared by the International Chamber of Commerce, la ICC Force Majeure Clause 2003, which provides the requirements that the party invoking force majeure has the burden of proving (in substance they are those provided by art. 79 of CISG), and it indicates a series of events in which these requirements are presumed to occur (including situations of war, embargoes, acts of terrorism, piracy, natural disasters, general strikes, measures of the authorities).

The ICC Force Majeure Clause 2003 also indicates how the party who invokes the event should behave:

• Give prompt notice to the other parties of the impediment;
• In the case in which the impediment will be temporary, promptly communicate to the other parties the end;
• In the event that the impossibility of the performance derives from the non-fulfillment of a third party (as in the case of a subcontractor) provide proof that the conditions of the Force Majeure also apply to the third supplier;
• In the event that this shall lead to the loss of interest in the service, promptly communicate the decision to terminate the contract;
• In the event of termination of the contract, return any service received or an amount of equivalent value.

Given that the parties are free to include in the contract the ICC Force Majeure Clause 2003 or another clause of different content, in the face of a notification of a Force Majeure event, it will, therefore, be necessary, first of all, to analyze what the contractual clause envisages in that specific case.

The second step (or the first, if, in the contract, there is no Force Majeure clause) would then be to verify what the law applicable to the contractual agreement provides (which we will deal with later).

It is also possible that the event indicated by the defaulting party does not lead to the impossibility of the fulfillment of the contract, but makes it excessively burdensome: in this case, you cannot apply Force Majeure, but the assumptions of the so-called Hardship clause could be used.

What is Hardship?

Hardship is another clause that often occurs in international contracts: it regulates the cases in which, after the conclusion of the contract, the performance of one of the parties becomes excessively burdensome or complicated due to events that have occurred, independent of the will of the party.

The outcome of a Hardship event is that of a strong imbalance of the contract in favor of one party. Some textbook examples would be: an unpredictable sharp rise in the price of a raw material, the imposition of duties on the import of a certain product, or the oscillation of the currency beyond a certain range agreed between the parties.

Unlike Force Majeure, in the case of Hardship, performance is still feasible, but it has become excessively onerous.

In this case, the model clause is also that of the ICC Hardship Clause 2003, which provides that Hardship exists if the excessive cost is a consequence of an event outside the party’s reasonable sphere of control, which could not be taken into consideration before the conclusion of the agreement, and whose consequences cannot be reasonably managed.

The ICC Hardship clause stabilizes what happens after a party has proven the existence of a Hardship event, namely:

• The obligation of the parties, within a reasonable time period, to negotiate an alternative solution to mitigate the effects of the event and bring the agreement into balance (extension of delivery times, renegotiation of the price, etc.);
• The termination of the contract, in the event that the parties are unable to reach an alternative agreement to mitigate the effects of the Hardship.

Also, when one of the parties invokes a Hardship event, just as we saw before for Force Majeure, it is necessary to verify if the event has been planned in the contract, what the contents of the clause are, and/or what is established by the norms applicable to the contract.

Is the Coronavirus a Force Majeure or Hardship event?

Let’s return to the case we examined at the beginning of the article, and try to see how to manage a case where a supplier internal to an international supply chain defaults when the Coronavirus emergency is invoked as a cause of exemption from liability.

Let’s start by adding that there is no one response valid in all cases, as it is necessary to examine the facts, the contractual agreements between the parties, and the law applicable to the contract. What we can do is indicate the method that can be used in these cases, that is responding to the following questions:

• The factual situation: what is the event reported by the Supplier?
• Has the party invoking Force Majeure proven that the requirements exist?
• What does the Contract (and/or the General Conditions of Contract) provide for?
• What does the law applicable to the Contract establish?
• What are the consequences on the obligations of the Parties?

What is the event reported by the Supplier?

As seen, the situation of force majeure exists if, after the conclusion of the contract, the performance becomes impossible due to unforeseeable events beyond the control of the obligated party, the consequences of which cannot be overcome with a reasonable effort.

The first check to be complete is whether the event for which the party invokes the Force Majeure was outside the control of the Party and whether it makes performance of the contract impossible (and not just more complex or expensive) without the Party being able to remedy it.

Let’s look at an example: in the contract, it is expected that Party A must deliver a product to Party B or carry out a service within a certain mandatory deadline (i.e. a non-extendable, non-waivable), after which Party B would no longer be interested in receiving the performance (think, for example, of the delivery of some materials necessary for the construction of an infrastructure for the Olympics).

If delivery is not possible because Party A’s factory was closed due to administrative measures, or because their personnel cannot travel to Party B to complete the installation service, it could be included in the Force Majeure case list.

If instead the service of Party A remains possible (for example with the shipping of products from a different factory in another Chinese region or in another country), and can be completed even if it would be done under more expensive conditions, Force Majeure could not be invoked, and it should be verified whether the event creates the prerequisites for Hardship, with the relative consequences.

Did the Supplier provide evidence of Force Majeure?

The next step is to determine if the Supplier/Party A has provided proof of the events that are prerequisites of Force Majeure. Namely, not being able to have avoided the situation, nor having a reasonable possibility of remedying it.

To that end, the mere production of a CCPIT certificate attesting the impossibility of fulfilling contractual obligations, for the reasons explained above, cannot be considered sufficient to prove the effective existence, in the specific case, of a Force Majeure situation.

The verification of the facts put forward and the related evidence is particularly important because, in the event that a cause for exemption by Party A is believed to exist, this evidence can then be used by Party B to document, in turn, the impossibility of fulfilling their obligations towards Party C, and so on down the supply chain.

Does the contract establish a Force Majeure or Hardship clause?

The next step is that of seeing if the contract between the parties, or the general terms and conditions of sale or purchase (if they exist and are applicable), establish a Force Majeure and/or Hardship clause.

If yes, it is necessary to verify if the event reported by the Party invoking Force Majeure falls within those provided for in the contractual clause.

For example, if the reported event was the closure of the factory by order of the authorities and the contractual clause was the ICC Force Majeure Clause 2003, it could be argued that the event falls within those indicated in point 3 [d] or “act of authority” … compliance with any law or governmental order, rule, regulation or direction, curfew restriction” or in point 3 [e] “epidemic” or 3 [g] “general labor disturbance”.

It should then be examined what consequences are provided for in the Clause: generally, responsibility for timely notification of the event is expected, that the party is exempt from performing the service for the duration of the Force Majeure event, and finally, a maximum term of suspension of the obligation, after which, the parties can communicate the termination of the contract.

If the event does not fall among those provided for in the Force Majeure clause, or if there is no such clause in the contract, it should be verified whether a Hardship clause exists and whether the event can be attributed to that prevision.

Finally, it is still necessary to verify what is established by the law applicable to the contract.

What does the law applicable to the Contract establish?

The last step is to verify what the laws applicable to the contract provide, both in the case when the event falls under a Force Majeure or Hardship clause, and when this clause is not present or does not include the event.

The requirements and consequences of Force Majeure or Hardship can be regulated very differently according to the applicable laws.

If Party A and Party B were both based in China, the law of the People’s Republic of China would apply to the sales contract, and the possibility of successfully invoking Force Majeure would have to be assessed by applying these rules.

If instead, Party B were based in Italy, in most cases, the 1980 Vienna Convention on Contracts for the International Sale of Goods would apply to the sales contract (and as previously seen, art.79 “Impediment Excusing Party from Damages”). As far as what is not covered by CISG, the law indicated by the parties in the contract (or in the absence identified by the mechanisms of private international law) would apply.

Similar reasoning should be applied when determining which law are applicable to the contract between Party B and Party C, and what this law provides for, and so on down the international supply chain.

No problems are posed when the various relationships are regulated by the same legislation (for example, the CISG), but as is likely the case, if the applicable laws were different, the situation becomes much more complicated. This is because the same event could be considered a cause for exemption from contractual liability for Party A to Party B, but not in the next step of the supply chain, from Party B to Party C, and so on.

How to limit supply chain risks?

The best way to limit the risk of claims for damages from other companies in the supply chain is to request timely confirmation from your Supplier of their willingness to perform the contractual services according to the established terms, and then to share that information with the other companies that are part of the supply chain.

In the case of non-fulfillment motivated by the Coronavirus emergency, it is essential to verify whether the reported event falls among those that may be a cause of contractual exemption from liability and to require the supplier to provide the relevant evidence. The proof, if it confirms the impossibility of the supplier’s performance, can be used by the buyer, in turn, to invoke Force Majeure towards other companies in the Supply Chain.

If there are Force Majeure/Hardship clauses in the contracts, it would be necessary to examine what they establish in terms of notice of the impossibility to perform, term of suspension of the obligation, consequences of termination of the contract, as well as what the laws applicable to the contracts provide.

Finally, it is important to remember that most laws establish a responsibility of the  non-defaulting party to mitigate damages deriving from the possible non-fulfillment of the other party. This means that if it is probable, or just possible, that the Chinese Supplier will default on a delivery, the purchasing party would then have to do everything possible to remedy it, and in any case, fulfill their obligations towards the other companies that form part of the supply chain; for example by obtaining the product from other suppliers even at greater expense.

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On December 30, 2018, the Comprehensive and Progressive Agreement For Trans-Pacific Partnership (“CPTPP”) entered into force

This Treaty is considered the third largest global trade agreement, positioned after the Comprehensive Economic and Trade Agreement between Canada and the EU (“CETA”) and the United States–Mexico–Canada Agreement (“USMCA”). The CPTPP sets forth a model of trade liberalization, aiming to maintain the markets open, increase world trade and create new economic opportunities for the member countries.

The CPTPP reaffirms and materializes a major part of the provisions of the Trans-Pacific Economic Cooperation Agreement (“TPP”), which had been originally signed by 12 countries, subsequently the United States of America (“USA”) announced its withdrawal.

As a result, this Treaty is the agreement reached by the remaining 11 countries of the TPP (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) in an effort to enact its provisions, since the original text is incorporated, except for 22 provisions related to rules presented by the USA, which were suspended.

The Agreement has four main characteristics:

1. Improves the access to the markets of the participating countries, eliminating and reducing tariff barriers amongst them. It also increases the pre-existing benefits between countries which had already entered into an agreement.
2. Promotes innovation, productivity and competition;
3. Encourages inclusive commerce, by incorporating new elements to ensure economic development, such as regulating the activities of state-owned companies, intellectual property, regulatory coherence, electronic commerce and support to Small and Medium Enterprises (“SMEs“) in order to streamline and simplify trade.
4. Through a regional integration platform, it aims to enhance the production chain and the possibility of including different and future economies.

To estimate the relevance of the Agreement, the Mexican Ministry of Economy stated that, although the absence of the USA reduced the economic dimensions of the market delimited by this instrument (from 40% to 13% of the world economy), future prospects are favorable since: i) the participation of the 11 countries, creates a market of 500 million consumers, ii) 13.5% of the world’s Gross Domestic Product (GDP) will enter in to this market and iii) the likelihood of incorporation of other countries is probable, which could compensate the absence of the USA.

With the CPTPP, Mexico intends to broaden its trade openness in the most dynamic zone in the world (Asia-Pacific), allowing Mexican products to enter into 6 new countries: Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. The aforementioned will promote the diversification of the trade economic activity, bolstering sectors such as agriculture, automotive, aerospace and products such as medical devices, electrical equipment, dairy products, tuna, sardines, cosmetics, tequila, mezcal, beer, etc.

This Agreement will also deepen the access to the Japanese market and will consolidate tariff preferences with countries with which a free trade agreement had already been signed, such as Canada, Chile and Peru.

The main motivation of the Mexican government in the negotiation of the CPTPP is to continue with a trade liberalization policy that began in 1989. Currently, Mexico has a network of 12 free trade agreements with 46 countries; 33 agreements for the reciprocal promotion of investments; and 9 agreements of limited scope (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association.

不同的商业环境经常提供签署“保密协议”（“NDA”）,“谅解备忘录”（“MoU”）或“意向书”（“LoI”）的机会。以至于这三个缩写词 （NDA，MoU和LoI）变得司空见惯，特别是在整个国际谈判中。

但是，这种协议经常被不恰当地使用，目的与国际商业惯例中订立的合同不同。由此这种协议没有用，因为它们不会有效地保护当事方的利益，甚至是适得其反。

我们将首先看一看“保密协议”（NDA）的特征以及如何使用它。

NDA是什么?

NDA是一种协议，其作用是保护当事人（通常称为“披露方”和“接受方”）希望彼此分享的保密信息，在不同情况下有:为与投资有关的初步尽职调查转发信息，为分销合同评估商业数据，与技术转让对象的特定产品有关的技术规范等。

事实上，谈判的第一步通常要求由一方或双方提供不同类型的，技术、财务或商业的信息，这些信息（以下称“保密信息”）在谈判结束期间和谈判之后必须保密。

当事人是谁?

从协议前提来看，正确识别有义务保护信息并保持其保密性的当事人非常重要，特别是在涉及集团公司、对话方可能较多且位于不同国家的情况下。在这种情况下，建议接受方通过具体条款保证所有公司的保密性。同样重要的是，该协议应准确地指明属于接受方组织的有权获得信息的人员（如：雇员、技术顾问、专家、合作者等），如有可能，应由所有参与人员签署保密协议。

什么是保密信息？

使用回收的NDA模板，可以在表单上找到，也可以由对应方提出，这当然不是一种推荐的做法，但不幸的是，这种做法非常普遍。这些模板常常是通用的，包括对保密信息的广泛定义和非常详细的列表，实际上包括了一项商业活动的所有内容，通常包括与交易活动无关的领域或非保密信息。

这些模板的问题是事后很难检查保密信息中是否包含的某些细节。例如因为在NDA签署之前不知道是否接受方已经拥有信息，或因信息没有在包含非常详细的清单的条款中明确提及，该清单不包括令人感兴趣的个别信息，或因在NDA签署之后信息以非保密且不可追踪的方式传输（例如，作为电子邮件的附件）。

最好的方法是以非常具体的方式指明需要共享的信息，将文件列在NDA的附件中，然后使文件以保密的形式提供，例如通过水印或者标记“NDA下的机密”。此外，最好是以安全的方式提供对保密信息的访问（例如只能通过分配给授权人员的个人用户名和密码登录访问在云中或在披露方服务器上受保护的区域）。

禁止使用保密信息

通常NDA模型只要求接收方保持信息的保密性，而不禁止其使用。这可能比披露更危险，特别是在双方为竞争公司的情况下：比如基于所获得数据的技术或专利的发展，或者客户名单或其他商业信息的使用。为了强调和加强这一义务，将文件命名为“保密和非使用协议”（“NDNUA”）更为正确。

期间

NDA的作用是在整个协议期间保护双方之间共享保密信息。因此，必须明确说明最后使用该信息的时间，并且如果接受方拥有保密信息的副本，确定归还或销毁文件，在保密协议结束后几个月（多年更好）保持。

不履行

通常量化因违反保密义务而产生的损害非常复杂。因此，规定惩罚条款可能是有用的，该条款预先规定了违约所造成的损害额。为此，重要的是考虑到对于因违反保密规定而造成的损害，惩罚的量化必须是合理的，并可根据违约的不同情况确定不同类型的惩罚（例如，使用共享技术信息注册或假冒专利，或与某些业务合作伙伴联系）。

在NDA中写入一个惩罚条款还有另外的优势:如果在谈判期间接受方对该条款提出异议或请求减少该条款，则该条款可表明对违约的心理保留，而且无论如何，这表明对支付该金额的忧虑，如果接受方打算严格履行合同义务，该忧虑就没有理由存在。

诉讼，管辖权及适用法律

即使在这种情况下，经常有不利好的做法，就是将这条款置于协议末尾（关于所谓的午夜条款，请参考legalmondo），因此对其内容没有给予足够的重视，这可能导致采用错误的（或无效的）条款。

实际上，这是一项非常重要的条款，因为其可以确保合同执行和/或获得快速有效执行的司法判决。没有一个适用于所有情况的解决办法，需要考虑谈判的个别具体规定:例如，在与中国对应方签订的保密协议中，选择意大利司法管辖并适用意大利法律可能会适得其反，因为有不履行的情况下，通常需要在中国迅速采取行动（甚至紧急采取行动）。因此，更适当的做法是，用中英双语草拟NDA，并规定在中国进行仲裁，适用中国法律。

结论

建议不要“自己动手”，而是寻求懂得如何起草NDA和同时考虑到案件的所有特点（谈判类型、拟分享的信息、当事人所在地和将执行NDA的国家）的律师的法律意见。

Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

“a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

(cf. the CJEU’s press release No. 132/2017).

This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite inte