The differences between sale, supply and distribution

Luca Davini
Lawyer in Milan and Turin

Preface

It is commonly known that the economic operators have continuous business relations of different typologies (e.g. sale, supply or distribution) with foreign customers.

By continuous business relations we mean to refer not only to the typical supply and sales concession contract, but also to the individual sales of goods made over time to loyal customers located abroad who buy products from time to time without further engagement with the seller.

In our experience in most cases these continuous business relationships are not governed by a contract.

The lack of a contract, however, could lead to the economic risks that we will examine below.

The continuing Business relationship


Generally speaking, we can identify the continuous business relation mentioned above in the following contractual patterns:

1. Consecutive sales of goods over time to a loyal customer; or

2. Supply of goods; or

3. Concession of sale/ distribution


The business relationship in question, when not based on a clear written contract, basically consist of the exchange of orders and order confirmations or customer orders, which are directly followed by delivery by the Italian Saler.

It is not uncommon during these relationships, which began as simple buying and selling goods, an additional unwritten relationship is established over time, a sort of tacit contract that can be defined as “framework contract”, which provides of additional commitments beyond the simple delivery of goods.

For example, the seller and the buyer agree on an obligation to supply the products at the supplier’s expense at certain times or according to the buyer’s need, an obligation to attend trade fairs, an obligation to promote sales of the products in a certain area, or the buyer is listed on the seller’s website and catalogs as the exclusive distributor for a certain area, etc…

The relationship thus configured then continues normally without problems until the moment in which, for example, the supplier decides to terminate the existing relationship due to a change in his business strategy.

If there is a lack of a contract attesting to the agreements between the parties, in these situations the buyer could argue to the seller that there were in place between simple sales but a genuine supply concession relationship on the basis of the de facto conduct of the business relationship, resulting in a claim for damages for loss of notice and, if the applicable law permits, even a severance payment (the latter in the context of the sales concession only).

It should be pointed out on this point that under Italian law, administration (a term substantially equivalent, for what is relevant here, to that of “supply”), a typical contract, is defined in Article 1559 of the Italian Civil Code as “the contract whereby one party undertakes, in return for a price, to perform, for the benefit of the other, periodic or continuous services of things”.

Equally, the concession of sale/distribution, an atypical contract and therefore not expressly regulated by our civil code, is connoted in turn by obligations of the parties that are quite different and additional to the simple sale that we outlined in the previous article in this journal.

Concession of sale- Supply- Faithful buyer over time


Examination of the factual situations described above is easy when the relationship with the time-loyal buyer involves nothing more than the transfer of goods for the consideration of a price.

However, when there are additional –even tacit- elements that can be drawn from the practices established between the parties, the qualification of the contract as a supply or sales concession will have to be made on a case-by-case basis taking into account all the elements and circumstances of the concrete case.

From the perspective of the European Union, the 2013 Corman Collins judgment of the Court of Justice (Case No. C9/12, judgment of 19/12/2013) drew an initial distinction between the two cases of sale and sale concession, with which national courts must comply.

Indeed, according to this judgment:

1. If the relationship between the parties is limited to the delivery of goods, it is a sale;

2. If, on the other hand, the reseller assumes further obligations relating to the distribution of the products (promotional and/or advertising obligations, participation in trade fairs, various services, in exchange for an economic advantage (exclusivity, transmission of know-how and training activities, payment facilities), the relationship can be framed as a concession of sale and therefore considered as the provision of services.

 This entails different effects on the law applicable to the relationship: application of the law of the supplier’s country in the case of a sale (and in the case of a supply relationship with a restraint to supply) and, conversely, application of the law of the distributor’s country in the case of the provision of services.

However, the identification of the elements from which to infer whether or not such obligations have been undertaken is left by the Court to the national courts, subject to the general principles established by the European Court of Justice in the aforementioned Corma-Collins judgment.

Once the type of ongoing relationship between the parties has been identified –and thus whether of sale or distribution- the law applicable to the business relationship will be identified (EC Reg. 593/2008) and consequently determined whether or not compensation is due.

The Granarolo/Ambrosi case (CGE C196-15)


For what is of interest here in the Granarolo Ambrosi case, the ECJ pointed out that a party’s action for compensation following a termination of business relations without notice does not fall under tort, whether intentional or negligent, if there exists between the parties an unspoken contractual relationship of long duration, and so a “framework agreement”, which it is up to the referring court to verify.

The national Judge, in this case the French one, according to the Court of Justice, is required to verify whether in the concrete case the business relationship is characterized by the presence of obligations tacitly agreed upon between the parties during the course of the relationship in order to qualify the relationship as contractual or of a different nature.

The existence of the relationship is not presumed but must be proven based on several concordant elements identified by the Court itself including, in particular:

1. the existence of longstanding business;

2. the good faith that has existed between the parties;

3. the regularity of the transactions and their development over time expressed in quantity and value;

4. any agreements on invoiced price and/or discount granted;

5. the correspondence that has taken place.

The risks of the Business relationship not governed by a contract: damages for lack of notice in the event of termination, compensation for termination of the relationship (customer indemnity) and compensation for damages.


The proper qualification of the relationship as a sale with a regular customer, supply or sales concession, is relevant in terms of the consequences if the business relationship is terminated.

In fact, the supplier who decides to terminate the relationship will run the risk that the reseller will invoke the existence of a continuous supply or sales concession relationship by claiming, in the first case, compliance with the obligation to give notice and the related compensation for damages and in the second case both the obligation to give notice now mentioned and the right to the payment of a notice and/or customer allowance and even compensation for damages depending on the factual situation and the law applicable to the business relationship that has taken place.

If, on the other hand, we are dealing with a de facto supply relationship, for example framed, from the point of view of Italian law, in the administration referred to in art.1559 et seq.c.c if the duration of the relationship has not been established the supplier who intends to terminate the contract will have to give a reasonable period of notice to the buyer.

It follows that the supplier who does not realize that he has acted in the context of a supply/administration, with a constraint to a supply a certain customer, and who has genuinely intended to stop selling his products to that customer by terminating the relationship without any notice, will run the real risk of having the buyer demand compensation for damages suffered.

The notice period under the Italian law


Italian law gives the dealer in the absence of an agreement the right to a reasonable period of notice, commensurate by case law with the duration of the relationship, which usually results in compensation equal to the loss of earnings related to the unused notice period.

For example, Italian jurisprudence has found a one year and an half notice to be congruous in relation to a relationship that lasted 25 years (Trib. Treviso 20/11/2015); on the other hand, it has not found a six-month notice to be congruous, replacing it with a one-year term about a ten-year contract (Trib. Napoli 14/9/12).

In other cases, Italian case law has established the duration of notice by analogy, in the absence of different contractual agreements, according to the rules governing the agency contract.

Conclusions


From the above it appears that the failure to regulate the longstanding de facto contractual relationship with a foreign client could lead to uncertainties regarding the legal qualification of the same and the consequent ways of proceeding to its termination consisting, particularly, in the obligation to observe or not to observe a notice period and to pay or not to pay in certain situations a more or less important indemnity (i.e., in the case of a distribution relationship).

We therefore recommend that you carefully examine your current international business relationships with your customers and suppliers through your trusted attorney.

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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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