Sale target: Targets and penalties to be set in case of non-achievement

Marcello Mantelli
Lawyer in Milan and Turin


During the negotiation for the distribution contract, the Italian supplier demands from the foreign partner a minimum annual purchase in money or goods. The distributor replies that he is willing to set a budget or a sale target. These are seemingly similar negotiating positions, but, they entail potential different consequences.

The distributor’s commitment, which has to be specified in the object of the contract, is the sales promotion within the agreed territory, to be carreid out with diligence and from which certain purchase levels should arise. However, as it is not easy to prove which of such promotion obligation measure suits the best, with due diligence, specific clauses on minumum business are often agreed upon in the practice of international contracts. Neverthless, attention must be paid in contractual clauses drafting.

As a matter of fact, in contractual practice we have noted the prevalence of three categories of contractual clauses on this argument regarding distributor contracts, agency, supply and license:

Incomplete clauses, which require the commitment of the partner in achieving a minimum purchase, without providing the consequences in the case in which it is not achieved.

Complete clauses, which require the commitment of the partner in achieving a minimum purchase, with the indications of the consequences, at the discretion of the supplier, in the case in which it is not achieved.

General clauses on budget or on the turnover target, which in commercial jargon mainly indicate quantitative forecast targets of turnover in a given period.

In the dealer’s perspective, in order to get an efficient working tool both from the commercial (to fix targets of measurable transactions across the network) and from the legal point of view (to establish a sanctionable contractual liability if it is not respected), it is advisable to draft the contractual provision indicating that the partner has the obligation to achieve a minimum purchase value, within the agreed period of time, with the commitment to renegotiate it in the following periods as stated in the provision.

In case of failure to reach an agreement on successive minimum purchases after those agreed upon initially reasonable automatisms should be provided, as an example through the annual percentage increases in turnover compared with the previous period.

In principal, unilateral fixing of a minimum with successive periodic increases by the supplier should be avoided, unless it is strictly related to the objective criteria (for example equal to the percentage increase of sales of its own network within a business area adjacent to that of the licensee).

A further element to be taken into account within the contractual provision is the need to reconnect specific consequences to the failure to reach the minimum, at the discretion of the supplier, among the reduction of the extension of the contractual territory, the cancellation of the clause of exclusivity, termination of contract, this latter based on Italian law on the article 1456 of the Civil Code (express termination clause) but substantially suitable to other national laws as well.

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Marcello

Dear Aurelia, the information you have provided are not sufficient for an answer which is subject to a professional engagement. In any case, we should study the provisions of the contract and identify governing law of the contract.If it does not provide anything on governing law then conflict law shall apply (in the most part of the countries likely the governing law will be the law of the country where the agent is domiciled). best regards Marcello Mantelli

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Aurelia

I signed a contract with a fashion agency but there were no termination clauses in the contract and decided to withdraw it before one week after signature so sent them an email but after 14 days they sent me an email and asserted that because i didnt withdraw in legal deadlines i have to perform the contract and pay whole money.Noboday told me about any deadlines and nothing was in the contract!! Why did they claim such a thing?

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