ITALY: Termination of distributorship contracts: abuse of right and violation of good faith.

On 5 February 2018 the Court of Appeal of Rome issued an important case regarding distributorship contracts (Decision No. 691/2018).

Silvia BORTOLOTTI - 18.04.18
Country expert

The case concerned the termination by Renault – occurred between 1992 and 1996 - of several distributorship contracts in Italy.

The termination was made in conformity with the period of notice contractually provided (as well as with the antitrust rule applicable at the time) and thus without the need to provide reasons for such decision (the so called «recesso ad nutum»).

However, the distributors argued that such termination was illegal, because it implied an abusive exercise of the right to terminate by Renault, the real intention of Renault being not simply to reorganize the sales network, but to replace the existing distributors with some of Renault’s former employees; the distributors also argued that they were asked to make investments and to undertake sales targets, which were incompatible with the decision to terminate and they finally claimed the analogical application of the rules on goodwill indemnity provided for commercial agents.

The Court of first instance rejected the claim stating that: (i) the term of notice was sufficiently long for allowing the distributors to find a replacement, as confirmed both from the fact that the antitrust rule applicable to such type of contracts provided for the same term and from the factual circumstance that most of the distributors were in fact able to find an alternative supplier within the said term; (ii) the further reasons that the distributors believed grounded the supplier’s decision to terminate seemed not to be reasonably sustainable in that specific situation and (iii) the supplier’s request to make investments and to undertake sales target’s obligations was not even alleged from the distributors to be outside the scope of the normal contractual performance and/or made through means incompatible with the subsequent termination.

The Court of Appeal confirmed the decision of first instance, mainly stating that a termination which respects the period of notice (“recesso ad nutum”) by its very nature implies that the terminating party is free to exercise this right without needing to give any reason for its decision. Consequently, the terminated party cannot object that the termination implied an abuse of right (“abuso di diritto”).

This argument was however rejected by the Court of Cassation, in its famous decision of 2009 (Cass. 18/09/2009, No. 20106, commented in the IDI website).

Namely, the Supreme Court stated that Courts are entitled to ascertain whether a contractual termination, even if “ad nutum”, is not abusive, i.e. does not breach the obligation of objective good faith, taking into consideration the “proportionality of the means used” and the purpose of the provision. Thus, according to the reasoning followed by the Supreme Court, even in case a right is exercised legitimately, from a formal point of view, such exercise can imply an abuse if it is used for reasons other than its objective function.

Following such decision of the Supreme Court, the legal proceeding was resumed before the Court of Appeal of Rome, which had to interpret and apply the principle stated by the Court of Cassation to the specific case.

The Court of Appeal of Rome, in its decision of 05/02/2018 commented here, decides at follows. In principle, the evaluation of the abuse of right should aim at considering a possible deviation from the purpose of the concerned right; the purpose of the right to terminate “ad nutum” is that of terminating a contractual relationship - usually by notice - without the need to motivate or justify such decision. Therefore, Courts cannot ascertain the reasons which bring the party to terminate, since, by doing so, they would change the notion of termination from termination “ad nutum” into termination “by cause”, which would be contrary to the rules of law. In fact, the Court makes in this regard a further argument which is not very clear: namely, it states that the evaluation whether the termination is made for a “further and different purpose” would still be admissible (which seems in contradiction with the previous statement) and seems not to evaluate this further aspect in the case at issue, for lack of evidence on the alleged further purpose.

In any case, the Court concludes by stating that the only admissible evaluation that can be made by Courts concerns the means through which the termination is enacted, which is also consistent with the general obligation of good faith during the performance of the contract, provided by art. 1375 c.c.

On the basis of the above, the Court concludes that in the case at issue Renault did not terminate the distribution contracts in good faith, because – on the light of a clear disproportion between the interests of the supplier and of its distributors – the supplier asked the distributors to sign additional conditions to the contracts, which included obligations to increase the turnover and to make investments shortly before giving notice of termination and without giving the distributors the right to negotiate a longer period of notice, or proposing a sum to compensate such investments etc. Through such behavior, Renault gave to its distributors a legitimate expectation about the continuation of the contract, and thereafter terminated the contract, contrary to good faith.

As far as the quantification and assessment of damages is concerned, the Court examines the position of each distributor, on the basis of the specific evidences provided by them on the amount of investment made; sell out of the stock; time within which they could find (or did not find) an alternative supplier; period of time that each of them could reasonably expect as a continuation of the relationship (e.g. two or four years, depending on the cases) etc. and concluded by granting a global amount of damages to the terminated distributors of more than € 2.000.000,00.

Finally, the Court expressly confirms the principle consolidated in Italian case law (and reaffirmed also in this case by the Supreme Court’s decision of 2009) according to which distributors cannot be granted a goodwill indemnity by analogical application of the rules on commercial agency.

The decision at issue is very interesting because it seems to narrow the interpretation of the principle established by the Supreme Court, by stating that Courts are not allowed to evaluate the reasons of termination, in case of termination “ad nutum” (since the purpose of such clause is to terminate without a need to justify the relevant decision); however, at the same time, it makes save the case of terminating for a “different purpose” and seems to exclude such possibility in the case of issue for lack of evidence on such a “different purpose”. That seems quite contradictory: for instance, a termination made with the purpose to discriminate a distributor over the other ones could be ascertained by Courts, or not?

Moreover, it ends by completely reversing the factual evaluation made by the Court of first instance and by granting an important amount of damages to the distributors, based on the violation of the principle of good faith (and finally not on that of abuse of right). In this regard, if the damages related to the sell out of the stock or the amortization of the investments are certainly compatible with the general principle on compensation for damages, the decision to compensate the reliance of distributors on the continuation of the contract is somehow disputable.

Ultimately, the decision no longer concerns the abuse of right, but the violation of good faith during contract termination (as an application of Article 1375 of the Italian civil code). As regards the compensation granted to the distributors for the legitimate expectation to continue the contractual relationship, the decision in the end concerns the reasonable duration of the notice period, which pursuant to the Court should have been (at least for some of the dealers) longer than the one provided for in the contract (and by the applicable antitrust rules).

It becomes therefore essential for suppliers to be very careful when they terminate their contractual relationship with Italian distributors, taking care not only of the length of the notice period, but also to the specific circumstances and the means through which termination is enacted.




Silvia Bortolotti, Secretary General IDI