Italy: Distribution Contracts: The Paradise For Forum And Applicable Law Shopping

Originally published August 2005

Distribution contracts fall outside the categories of contracts specifically defined by the Italian Civil Code: there is no legal definition or specific regulation of distribution to be found in other statutes, as is the case in most countries.

Scholars and case law have construed the relevant regime applicable to distribution contracts governed by Italian law by reference to the general principles appropriate to contractual obligations, as well as to the statutory rules suitable to contracts of a similar nature.

This is why, whenever a dispute arises and the parties have not determined the competent jurisdiction and/or applicable law, the competent forum remains uncertain and conflicting arguments are invariably put before the court or the arbitrators, who must establish the substantive law governing the contractual relationship concerned.

With regard to jurisdiction, whenever the issue arises before a European court, the solution is usually determined in accordance with the jurisdiction criteria laid down by the Brussels and Lugano Conventions, and now by EU Regulation No 44/2001.

The ‘obligation in question’ test referred to in Article 5.1 of the Brussels and Lugano Conventions and now in Article 5.1 EU Regulation No 44/2001, ie the test which examines where obligations are to be carried out under the contract in order to determine jurisdiction when such has not been stipulated by the parties, usually allows the choice between the manufacturer’s and distributor's countries when distribution agreements are the subject matter of the dispute, since by their very nature they contain several different sets of obligations on both parties.

Although the court should confine itself to identification of the obligation upon which the claim is based and of the place of performance of such obligation under the contract and the law, the claims raised by the plaintiff may arise from breach of several different obligations.

In fact, the ‘obligation in question’ test can result in jurisdiction being granted on the basis of any of the manufacturer’s or distributor’s obligations, or any combination thereof.

If a claim arises out of the distributor’s obligations related to the marketing and promotion of the contractual products, a court could find that only the court of the country where the distribution activities are carried out is competent to hear the case, which is often the country where the distributor has its main place of business. Therefore, whenever this is true, the manufacturer cannot sue the distributor in any other country. However, if the subject matter of the dispute is, say, the use of the manufacturer’s trademarks or other IP rights or the (non) performance of the sale of products, aspects which are also a substantial part of the distribution relationship, the scenario could be very different.

Under the Brussels and Lugano Conventions the courts should distinguish first which type of obligation is ‘in question’, ie payment of the price or delivery of conforming goods, etc whose place of performance may vary from one contract to another, from one applicable law to another.¹ Under EU Regulation No 44/2001, the main rule is now supplemented by provisions in Article 5.1(b).

However, given the complex structure of the distribution contracts, it is difficult to assess whether the courts will be more inclined to refer to Article 5.1(b), first indent of EU Regulation No 44/2001 and thus determine the place of performance of the sales under the distribution contract, rather than to Article 5.1(b), second indent of the same Regulation, if they consider the distribution contract to be a service contract, thereby conferring jurisdiction upon the courts of the distributor’s country.

We believe that it could also be argued that none of the presumptions in Article 5.1(b) EU Regulation No 44/2001 could apply. For example, this could be the case when the claim is based on various obligations stipulated under the distribution contract both relating to sales and to promotional services. If none of the presumptions in Article 5.1(b) EU Regulation No 44/2001 apply, the court should determine at its discretion the ‘obligation in question’ pursuant to the rule set forth in Article 5.1(a) as is provided in Article 5.1(c).

Different solutions can result and will depend upon which approach the court decides to follow.

For example, when many claims are brought at the same time, based on several different obligations set forth in the distribution contract, pursuant to a judgment rendered by the European Court of Justice,² the court should determine ‘the main obligation’ among those actually referred to in the plaintiff's arguments. By its nature, such evaluation is subjective and not always predictable, even if it can be manipulated to some extent by skilled counsel.

Once the ‘main’ obligation in question is determined, the court which has jurisdiction is that of the place of performance of such obligation. However, the result of the court’s analysis is generally not that straightforward, especially when the solution depends on the court’s determination of the place where payment should be made to the seller, or where delivery of the goods should take place. If no specific clause exists in the contract, the court’s determination must be made on the basis of the substantive law applicable to the contract, which in turn could be an additional issue in dispute to be decided by the court on a casebycase basis, thus opening the way to further arguments, which can be ultimately decided only by a judgment.

Similarly, determination of the substantive law applicable to distribution contracts, absent the parties’ choice, is far from being a settled issue.

The applicability of the 1980 Vienna Convention on the International Sales of Movable Goods (CISG) to distribution contracts is a highly debatable subject.

When the issue before the court is the performance of the sale obligations, or when it forms a preponderant part of the contractual relationship, the parties should expect the courts to apply CISG, provided that either of the conditions set forth in its Article 1 is met.

If the conflict-of-law provisions are to applied, as would be the case for all issues which are not regulated by CISG and do not pertain to single purchases, the European courts must refer to the rules of the Rome Convention on the Choice of Law for Contracts of 19 June 1980 (the ‘Rome Convention’), which are one and the same for the courts of all Member States.

Unfortunately, when such rules are applied to distribution contracts, solutions differ.

The applicable law, in the absence of choice-of-law clauses, is the law of the country with which the contract is most closely connected. Pursuant to Article 4(2) Rome Convention, it is presumed that the contract is most closely connected with the country in which the party who is to carry out the performance which is characteristic of the contract has its main place of business.

Surprisingly, there is no unanimity on identifying the ‘characteristic obligation’ of a distribution contract. In Italy, outstanding scholars suggest that the distributor is the party performing the obligations which are more pertinent to the economic function of the contract,³ but the Italian Supreme Court has not yet given a clear indication on this issue, and this solution is the opposite to that which is normally applied to purchase and sale agreements, where there is little doubt that the supplier’s performance is that which is ‘characteristic’ of the contract.

In Europe, there are a number of different positions also.⁴

As mentioned above, the legal definition of the distribution contract itself that the court or the arbitrator determines could influence the choice of the substantive law applicable to the merits.

Moreover, when the dispute is referred to arbitration, and there are no provisions in the contract which otherwise fix the law applicable to the contract, the arbitrator(s) can determine the proper law applicable to the merits or can determine the conflictoflaw principles that it will apply in order to identify the substantive law governing the contract. More flexibility means uncertainty as to the solutions which will be adopted by the arbitrators as well as more room for manoeuvre by the parties’ counsel.

In this scenario, two very recent decisions of first instance Italian courts add fuel to this debate.

The Court of Pesaro, in a judgment of 16 June 2005,⁵ dismissed a claim brought by an Italian manufacturer against its Portuguese distributor based on an alleged breach of the latter’s obligation to promote and market its products in Portugal, on the grounds that the obligation is question was to be performed in the defendant’s country.

By a secondary argument, the court held that the solution would not have changed if it was assumed that the sale of products was the ‘characterising obligation’ of the contract because, pursuant to Article 5 EU Regulation No 44/2001, the place of performance of the sale contract is to be identified as the country where the buyer takes actual possession of the goods sold.

First, the ‘characterising obligation’ test should not have come into play in determining the jurisdiction issue.

Secondly, it appeared that supplies were sold ‘exworks’.

On this point, the court has explicitly referred to a judgment of the Court of Rovereto dated 2 September 2004,⁶ which states that the place of performance of the sales contract as defined in Article 5.1(b) first indent of EU Regulation No 44/2001 is to be construed as an ‘autonomous concept’ for the purposes of determining the jurisdiction of an EU court under European law and it shall identify only one competent court (in addition to that of the defendant’s domicile).

Therefore, the Court of Rovereto held that the word ‘delivery’ in Article 5.1(b) of EU Regulation No 44/2001 is to be regarded as the physical handing over of the goods to the recipient buyer. This interpretation, the Court of Rovereto believes, is not only consistent with but best corresponds to the spirit of EU Regulation No 44/2001, ie to simplify the rules inherited by the Brussels Convention so as to ensure the highest degree of predictability.

This is indeed the goal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.