Agency Contracts in Italy: red flags for fashion companies

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A brief overview of the national regulation on agency contracts, firstly to highlight the key aspects of this sector and, secondly, to point out the peculiarities of these matters, which often represent threats for principals.

The agency contract represents one of the most important tools for entrepreneurs who seek to create their own product promotion network. This tool is particularly relevant within the fashion industry and it is used, among others, by new fashion and luxury companies which need a channel to promote their brands.

Therefore, first of all, it is of particular interest to offer a brief overview of the national legislation on agency contracts, highlighting the fundamental aspects of the sector; secondly, it will be useful to point out the peculiarities of these contracts, which often represent threats for principals.

Agency contracts and national legislation

Within the Italian national legal system, the agency contract is regulated by article 1742 and subsequent articles of the Italian Civil Code. In particular, the agency contract is an agreement whereby the entrepreneur appoints an agent to facilitate, on an ongoing basis, the conclusion of contracts for the marketing of its products within a specified territorial area.
The activity of the agent – who is also qualified as an entrepreneur as it bears the economic risk of its activity – consists in finding new customers and businesses for the entrepreneur by transmitting to the principal the orders it collects within a given geographical area.
As remuneration for the activity performed, the agent is entitled to receive a commission, which is a fee proportional to the number and amount of businesses and transactions concluded on behalf of the principal.
The agency contract represents a typical contract for continuous or periodic performance, which can be concluded for a fixed term or indefinite term, with or without exclusivity. Upon termination of the relationship, the agent may be entitled to receive an equitable indemnity calculated pursuant to the conditions provided for by article 1751 of the Italian Civil Code. This indemnity is not due when the termination of the contract is caused by an agent’s default or is a consequence of the agent’s withdrawal or when the agent assigns to a third party the rights under the agency contract.

Agency contracts in the fashion industry

Among the various tools available in the market for the distribution and sale of fashion products, agency contracts are of particular importance. In fact, they are among the main channels of distribution and marketing of products in the fashion industry.

The agency contract, in fact, presents clear advantages for the entrepreneur, as it allows the fashion company:

• on the one hand, to carry out widespread distribution throughout the territory, relying on specialized individuals for the direct sales relationship with customer; and
• on the other hand, to invest limited resources. Indeed, it is sufficient to equip the agent with the necessary tools for the promotion of products (look books, guidelines and reports) and to maintain an adequate flow of information during the promotional phase. Furthermore, from a strictly economic point of view, the investment required to implement an agency network is certainly lower than that of other distribution strategies.

However, as a counterbalance to the above, the agency contract imposes onerous constraints on the principal both in terms of limited means to “exit” the relationship and in terms of compensation due to the agent. The agency contract, in fact, is subject to a specific and peculiar regulation in our legal system aimed to protect the position of the agent, making it burdensome for the principal to withdraw from the contractual relationship.

Red flags

Given the specific market sector under analysis, the critical issues that fashion companies, especially in the initial phase of their businesses, should cautiously consider when they intend to enter into an agency relationship are highlighted below. As mentioned above, these critical issues arise when the fashion company wants to terminate the agency relationship.

When are termination indemnities due to the agent?

Upon termination of the agency relationship – except when the termination is the result of an agent’s default, is a consequence of the agent’s withdrawal or when the agent assigns to a third party the rights under the agency contract – the agent is entitled to receive indemnities, as long as the following conditions are met:

• the agent has provided new clients or has increased the business with existing clients, and the principal continues to benefit from the agent’s activity;
• the payment of such indemnities is fair compared to the commissions that the agent will lose due to the termination of the contract; and
• the indemnities are claimed no later than one year after the termination of the contract.

What is the amount of the termination indemnities?

Indemnities cannot exceed an amount equal to a year of commissions, calculated by taking the average of the commissions received during the previous five years (or for how many years commissions have been paid, if less than five).

When is the agent’s right to receive indemnities excluded?

Firstly, the agent loses the right to receive indemnities when the principal terminates the contract as a result of a default attributable to the agent, which, because of its seriousness, does not allow a continuation of the relationship, even on a temporary basis.

Therefore, in order to exclude the right to receive indemnities, it is not sufficient for the agent’s default to be of “slight importance”, but instead it should be of such seriousness that the contract can no longer continue in any way.

Secondly, the agent loses the right to receive indemnities without just cause in case of withdrawal from the contractual relationship, if the conditions in the previous paragraph are not met. In particular, when:

• the agent has not provided new clients or has not increased the business with existing clients, and the principal will not gain any future advantage from the agent’s activity;
• the payment of such indemnities is unfair compared to the commissions that the agent will lose due to the termination of the contract; and
• the indemnities are claimed more than one year after the termination of the contract.

How to formalize the termination of the relationship?

The timing to formalize the termination of the relationship is essential. Even in cases of serious default of the agent, the principal is not allowed to terminate the relationship without any formality. On the contrary, it is necessary for, concurrently with the above, the principal to expressly communicate the reasons for which it wants to terminate the relationship, specifically listing the breaches committed by the agent and their seriousness.

Pending orders at the time of termination: what is due to the outgoing agent?

The agent retains the right to receive commissions for business concluded after the termination of the agency, provided that:

• the offer for such business was received before the termination of the relationship; and
• the business was concluded within a reasonable time after the termination of the relationship.

Termination clauses for failure to achieve sales targets

It’s often the case that the agency contract contains clauses which require the agent to reach minimum sales targets. Such a clause, together with the express termination clause, assuming that the parties have considered the failure to meet the established sales targets as particularly serious breach, should – at least in theory – result in the loss of the right of the agent to receive the payment of termination indemnities.

However, it is important to emphasize that the recent case law on agency contracts has taken a particularly cautious attitude towards agents. According to the mentioned case law, it should be appropriate, even in the presence of an express termination clause, to assess the seriousness of the breach, for example by verifying whether, in concrete terms, the difference between the result achieved by the agent and the sales target could qualify as a breach so serious as to prevent the continuation of the relationship even on a temporary basis.