Distribution and Retention of Title

6-12 February 2000
Crested Butte, Colorado
Fabio Marazzi

Introduction

The assigned argument is wide and, for some aspects particularly complex; therefore, deferring a more detailed analysis of the connected problems to a following contribution in writing, it is my purpose, here, to deal with general topics connected with distributorship contracts and the importance of retention of title clauses.

First of all, since I have been invited to explain my opinions in an international context, I will speak about the aspects connected with distributorship and retention of title in an international field, supposing everyone here attending, knows how and if a distributorship contract is regulated in its own Country; then, since I am, in this session, the only one from Europe, it is my purpose to speak about regulation of retention of title not only in Italy, but also in France and Spain, and I will speak, also, about Belgium's law regulating distribution.

The distributor figure appeared at the beginning of the Twenty Century, in all the European Countries, within the commercial distribution field, which is characterised by the assumption of the entrepreneurial risk in sale to third entities, from which distributor exonerates the supplier.

It came from a continuative sale relation, in which it was included an exclusivity clause, and with which the distributor being, generally, client of a Company, agreed with the Company in order to intensify, with continuity, the purchases within a fixed territory, with the reciprocal grant of the exclusivity, with the duty for the distributor to carry out promotional activity, to take a minimum annual quantitative of goods, to carry out advertising according with the supplier policy, and with all the other negotiations in order to increase the marketing of supplier's goods.

Distribution

For what is concerning Italy, it does not exist a law definition of distributor; distributorship contract is included under the provision of Book 4, Title II, Chapter V, article 1559 of the Italian Civil Code: "The supply contract is one with which one party binds itself, under the corresponding price, to do, for the other party, periodic and continuative performance of promises."

Distributorship contract is, generally, arranged and treated like a supply contract and considered, because of its peculiarity, as a kind of supply contract.

In distributorship contract with exclusivity clause, it is frequent the assignment, to the distributor of the right to use supplier's trademarks and patents (this assignment is normal in franchising contracts).
Sometimes, and in daily experience this is the rule, distributorship contract arises from a previous agency contract, in which the agent agrees with the supplier to get the exclusive distribution, and to purchase on his behalf supplier's products, in a continuative and stable way.

Furthermore it is usual, in international agency contracts, the clause providing to give the agent the possibility to purchase the products, in order to resell to clients who want to avoid customs' and monetary problems purchasing directly from the supplier; in this case the figure of the agent and the one of the distributor are get together in the same entity and it will result the assembly in the same contract, of different elements.

Distributor maintains, in all the situations above mentioned, all the same peculiarities, even if it is true that, in case of the agent transformed in distributor, there is a marked presence of the fiduciary element.

About exclusivity, while it is common in agency contract, even if it is not an essential element, it is true in the Italian Civil Code it comes from law provisions and from collective agreements, unless derogatory clause is provided in every single contract; in the distributorship contract it is an incidental clause of the contract.

Consequently, in the Italian legal system there is no exclusivity clause in distributorship contract, in absence of an agreed clause, as frequently happens.
The exclusivity clause could be either bilateral or unilateral; in the bilateral one, the supplier binds himself, in distributor's territory, not to appoint other distributors and not to sell directly and the distributor binds himself not to purchase competitive products from other suppliers.
Sometimes the supplier reserves itself the right to sell directly in distributor's territory, under the payment of a commission.
The unilateral exclusivity clause binds only the supplier or only the distributor; generally only the distributor.
In this case, we will have a situation like the one of the exclusive agent: distributor could be bound not to purchase products from other suppliers, either competitive or not.

In conclusion of this introduction, summarising the peculiarities of distributor, as an independent entity that:
it is authorised to sell products supplied by the manufacturer/supplier, within a fixed territory and it is rewarded by the gain getting with the sale of the products;
it purchases products from the manufacturer/supplier and it resells them to its clients on its name;
it has not any power to bind the manufacturer/supplier;
it sustains all the commercial risks connected with the sale;
it organises and keeps a storehouse and it distributes products to its clients;
generally, it sells products in manufacturer's packaging and with manufacturer's trademarks.

Distributorship contract, like franchising contract and for some aspects also agency contract, are, more than all the other international agreements, subject to an extraordinary variety of rules which regulate their existence, in order to get different aims and, for this reason to draft these contracts it is necessary a particularly attention to the specific legal disposals in force in the sale territory.

In France the exclusive distribution contract remains essentially governed by the standard legal provisions of commercial contracts, since no specific law or regulation has so far been issued in this regard.

Only two Communities regulations relating to the application of Article 85 (3) of the Treaty of Rome (EEC Regulation no.1983/83 of 22 June 1983 relating to certain categories of exclusive distribution agreements; EEC Regulation no.123/85 of 12 December 1984 relating to categories of distribution and sales and servicing agreement for automobile) and case law have defined the legal treatment of the exclusive distribution contract.

The contract consists, "in placing the distribution concern of a merchant called dealer in the service of a merchant or industrialist called supplier to ensure, in a given area, for a limited period of time and under the supplier's supervision, exclusive distribution of products for which the monopoly of sale is granted".
(Champaud, "La concession commerciale", RTD Com. 1963, p.451)

The dealer acts in his own name and his own behalf, buying from the supplier products, which he/she then resells to customers.
Unlike the franchising contract, and what has been referred above about Italy, the exclusivity granted to the distributor is an essential component of this type of contract and conditions its legal qualification; without territorial exclusivity, the exclusive distribution contract may be disqualified as an authorisation contract.
(Sup. Ct. Com. 9 February 1976)

In Spain there is no specific legislation regarding distributorship agreements.
However, according to Article 1255 of the Spanish Civil Code:
"The contracting parties may establish the convenants, clauses and conditions that they deem appropriate, provided they are not contrary to the law, ethics or public order".

This article sets forth the general principle of the parties: freedom to devise any contractual regime that may suit their interests, within the mentioned limits of abiding by the law, ethics and public order. This means that apart from the typical contracts that are envisaged by the legislation there is an unlimited number of atypical ones, not expressly regulated, which can be designed by the parties.

Court decisions as well as some authors have drawn the profile of distributorship agreements in Spain.
Taking these sources into account, a distributorship agreement can be defined as a co-operation contract of commercial character by virtue of which one party called distributor binds himself to market, in his own name and interest, during a limited period of time, within a specific territory and pursuant to agreed conditions, the products specifically sold to him by another party called supplier.

Given the absence of a specific legislation on distributorship agreements in Italy, France and Spain, we may conclude that the relationship between the parties to such contracts must be governed by the covenants agreed upon in contract, general contract rules, trade usage and general principles of law.

In Europe, it is only Belgium, which has a statutory law concerning and protecting distributors, the law of 27 July 1961 as modified by the Statute of 13 April 1971.
It defines the distribution license ("concession de vente") as a contract "by which a licensor reserves to one or several licensee the right to sell in their own name and at their account the goods which he/she produces or supplies".

The facts that is only Belgium with a statutory law is probably due to the fact that sales distribution contracts are very common in Belgium to the point that the Belgian parliament believed it had to intervene to protect the distributor from an untimely termination of the contract by the supplier and to assure the distributor fair compensation to enable him to change from one supplier to another, except when there is serious fault on the part of distributor.
Thus, the Belgian Law of 27 July 1961, which is imperative, on unilateral termination of exclusive distribution contracts of an indefinite term was aimed at stabilising the relationship between suppliers and distributors and at ending the former legal insecurity.

In order for the Distribution Law to apply it is not necessary that the manufacturer or importer grant the distribution of all its products to the distributor; the existence of an exclusivity, quasi-exclusivity or of important obligations and consequently the applicability of Distribution Law must, therefore, be examined on a product-by-product basis; the Distribution Law only applies to distribution of products manufactured or distributed by the manufacturer or supplier, and not to the distribution of products transformed by the distributor or incorporated in other products either supplied by another manufacturer or manufactured by the distributor and therefore it is clear that not all distributorship agreements will fall under the scope of Distribution Law, which, furthermore, only regulates the termination of distributorship agreements.
The termination of distributorship agreements which do not fall under the Distribution Law and matters other than termination are covered by the general rules of Belgian commercial and contract law.

Retention of Title

It may be common to have a "Title retention clause», or "Romalpa" clause, into a distributorship agreement; the clause usually states that:
"The Supplier retains ownership of the Products the property in which shall not pass to the Distributor and the Distributor shall keep any products delivered to it as bailee for and on behalf of the Supplier until the Supplier has received payment of the price of the Products…"

The clause serves to separate the passing of title and risk of loss and therefor the aim is to prevent title in the goods passing until payment, improving the supplier's position if the distributor becomes insolvent before then.
Risk of loss and title usually pass when the goods are delivered by the seller; this should be specified in the agreement, but may be implied by local law, trade terms or the CISG if applicable.

Particularly with an export sale, title retention clauses should be carefully considered in the light of the type of goods being sold. If the goods could possibly cause environmental or other liability in the distributor's country, then the supplier should contemplate giving up any claim to title as soon as the goods are delivered. Otherwise, the supplier may get a nasty surprise. If the distributor has an environmental accident with the goods, the supplier, by virtue of its title retention clause, may find itself liable for clean-up costs and other environmental liabilities in the distributor's country.

Furthermore, care has to be taken for the fact that the law governing these provisions varies significantly from country to country; in addition, it has to be kept clear in mind that where the United Nations Convention on Contracts for the International Sales of Goods (CISG) applies, article 67) provides that the risk of loss passes to the buyer when the goods are handed to the first carrier for shipment to the buyer, unless the contract is specific about where the goods are to be handed over to carrier, in which case, risk of loss passes when the goods are delivered to the carrier at the specific place.
Some countries require formalities to be observed for the retention of title clause to be enforceable; referring to the countries examined before, a brief summary on Italy, Spain and France is following.
First of all, has to be stated that a preliminary check has to be done whether the retention of title clause works under both the law of the distributor's country and of the contract; although it may help if the contract is governed by a legal system that is supportive of these clauses, ultimately recovery will depend on local rules.

In Italy, retention of title clauses are possible, but onerous formalities make them impractical; this clause is expressly provided for by the Italian Civil Code (Articles 1523 - 1526) only for sales where the price is payable by instalments, if a retention of title clause is included in an instalment contract, it will be subject to the Civil Code.
However, a retention of title clause may be included in any sale contract where deferred payment is provided.

The clause has to be agreed on entering into the sale; a later agreement would be null and void, since title, which in accordance with the Italian law passes when parties agree to sale, would have already passed.
The clause should preferably be included in the sale contract, even if may be also in a separate document.

The onerous formalities required are:
Execution before a notary: registration for tax purposes: the contract must be formed by both parties and contain sufficient elements and details of goods and their price.
The good are to be always identified.
This explains why retention of title is rather rare in Italian practice, except for the sale of plant and machinery.

A third party will acquire title to goods sold in breach of a prohibition if it receives them in good faith.
To be enforceable a retention of title clause has to precede the attachment by the creditors or insolvency of the buyer.
A clause has to be included that allows the supplier to terminate the contract and take possession of the goods, not only in case of payment defaults, but also if the distributor has in any way prejudiced supplier's title to the goods.

In France, title passes when the parties agree on the goods sold and their price, even if the delivery and payment has not yet occurred (Article 1583, Civil Code).
The retention of title clause must form part of the contract and must be agreed not later than delivery; it must be in writing and should appear in bold characters.

The clause should provide that if the goods cannot be identified and separated, the supplier will be entitled to recover possession of goods of the same nature and quality held by the distributor in its inventory.

The claim for recovery is not barred by the incorporation of the goods into other products unless they have altered in nature and they cannot be separated without damaging or decreasing the value of the goods into which they have been incorporated.

Under French law, the retention of title clause is effective only as long as the price of the goods concerned remains unpaid; accordingly, it may not be used to secure the payments of debts other than the price of the goods sold.

The Law no.94-475 of 10th June 1994 provides the unpaid seller with more protection in case of bankruptcy of the buyer; however, it requires certain formalities and time constraints to be complied with.

The courts have accepted retention of title clause in Spain since last century.
Unlike other Roman law systems, e.g. Italy and France, transfer of ownership in Spain requires not only the agreement to sell but also the delivery of the items sold combined with the intention of transferring ownership.
The clause can be set out in the contract or in a different document; it can be agreed orally, but this makes proof difficult.
There is no specific regulation of retention of title, except if it relates to credit or instalments sales to consumers (e.g. car) when the retention has to be registered.

About the choice of law, whether Spanish law applies depends on whether the clause is considered contractual in nature, in which case the parties may chose a different legal system if it has connection with the purchase or whether it is in the nature of a property related guarantee, when it will be subject to the law of the place where the goods are located.

Conclusion

Even if, for time and space reasons, restricted to few notes, the foregoing survey will have shown that there are differences between the different legal systems of the Member States of the European Union, governing the kinds of securities which they respectively recognise and between the legal rules which apply to such securities.

In view of these differences, any attempt to harmonise or approximate the laws of the different countries will be beset with almost insurmountable difficulties.
Even the introduction of a standard registration system so as to provides publicity and to determine priorities would probably founder because the underlying systems of the Member states so divergent.
The only attempt which has so far been made toward harmonisation of national laws is in respect of retention of title clauses in agreements for the sale of goods, and that was confined to simple retention of title provisions which do not extend to the proceeds of resale.

The prognosis for harmonisation is poor, but before attempting it, it is worthwhile asking whether it is necessary.