DISTRIBUTION CONTRACTS AND ARBITRATION: HOW TO DEAL WITH SMALL AGENCY AND DISTRIBUTION DISPUTES

1. DISTRIBUTION CONTRACTS AND ARBITRATION: HOW TO DEAL WITH SMALL AGENCY AND DISTRIBUTION DISPUTES Vienna June 16, 2007 IDI 2007 Meeting BENEDETTA COPPO CHAMBER OF ARBITRATION OF MILAN www.camera-arbitrale.com

2. Distribution disputes: main features • Suppliers offering new and constantly updating goods and services • Highly competitive markets • The system has to comply with different national rules and international conventions • Complex matters are faced, i.e. arbitrability of the dispute, selection of the applicable law • Quick and effective decision are of the essence • So called “small disputes” prevail Are distribution contracts developing their own dispute resolution system?

3. Is arbitration a suitable means of solving distribution disputes? • Qualifications of the arbitrator • Time and costs efficiency • Enforcement of the arbitral award • (Confidentiality)

4. "Ad hoc" vs. "institutional" arbitration: • a fundamental choice for the organisation of arbitration procedures • Art. 4 Geneva Convention 1961: parties are free to choose an “ad hoc" procedure or the one stated in the set of rules laid down by a permanent arbitral institution • Recent national legislation reforms on arbitration: i.e. new Art. 832 Italian Code of Civil Procedure (legislative decree 40/2006)

5. Distribution is a specific sector: the nature of the disputes requires highly qualified and specialized decision-makers Distribution is governed by a complex legal framework (at National and/or International level): expert arbitrators should be aware of it Distribution arbitration usually concerns international contracts: linguistic skills and comparative law abilities are recommended Neutrality INSTITUTIONAL ARBITRATION: Selected panel of competent and qualified arbitrators Chamber of Milan: no list of arbitrators Supervision of arbitrators' independence (statement of independence and confirmation) Chamber of Milan: Art. 19 of the Rules + Code of Ethics Qualifications of the arbitrator

6. Costs are a key element whether to select arbitration INSTITUTIONAL ARBITRATION Predictability and transparency: fixed fee schedules and pre-established criteria to determine the value of the dispute Time and costs efficiency Distribution disputes require speedy solutions: • Parties and arbitrators determine the speed of the process INSTITUTIONAL ARBITRATION • Flexibility of the procedure • Time “control” • Logistic assistance parties can choose the “rules of the game”: hence, they can influence time and costs of the proceedings…

7. …Arbitration clause to be carefully draftedAn example: In 2001 parties entered into an agreement whereby Claimant – a Belgian business – was appointed as exclusive agent to promote sales of Defendant's products – an Italian manufacturer – in certain Eastern European countries. The agreement was in English and contained the following arbitration clause: “Any dispute difference or question arising between the parties out of or in connection with this agreement or the right or liabilities of the parties hereunder if not settled between them by agreement shall be finally settled by arbitration in Milan under the Rules of the Milan Court of Arbitrationbyone or more arbitrators appointed in accordance with the Rules.” Extremelyrare situation: The contract contained no further specification BUT, when filing respectively their request for arbitration (Dec. 2006) and statement of defence (Feb. 2007), parties agreed on: • The Arbitral Tribunal to consists of a Sole Arbitrator • The Sole Arbitrator to be Italian (derogating to the “third nationality rule” provided by Art. 15.5 of the Milan Arbitration Rules) • Italian law to be applied to the merits of the dispute • Italian to be the language of the arbitration • Acts and documents to be anticipated via e-mails

8. Enforcement of the decision • Arbitral awards can be challenged on limited grounds • Generally, arbitral awards are voluntarily executed • International arbitral awards are easily enforced (New York Convention) INSTITUTIONAL ARBITRATION: • assistance throughout the proceedings for parties and arbitrators Chamber of Milan: >Secretariat's experience in support of due process principle >Examination of draft awards with regards to formal requirements only, where the Arbitral Tribunal so requests (Art. 34.4 of the Rules) • AND: even before the arbitration Chamber of Milan: model clauses

9. Highlightsof the Chamber of Arbitration of Milan Administering the arbitration also implies: • receiving and forwarding acts • hosting hearings (cooperation with other national and international institutions) • providing logistic assistance • taking minutes of hearings (wherever) What's more? • International programs, i.e. in the Mediterranean basin • In 2007 developing on line arbitral proceedings (still to be launched) • Library focused on arbitration and ADR • Training courses • Mediation service: 320 new requests filed in 2006 • Italy-China Business Mediation Centre (since 2005): 15 new requests in 2006

10. Chamber of Arbitration of Milan2006 facts and figures • New requests: 102 • Domestic arbitrations: 80% • International arbitration: 20% (Jan-May 2007: 46 new requests and 28% international) • Average value of the dispute: € 11 030 084 • Average duration: 11,7 months • Appointed arbitrators: 186 • by the Parties: 54% • by the Arbitral Council of the Chamber: 34% • by the Co-arbitrators: 9% • by other appointing authorities: 3%

11. Chamber of Arbitration of Milan2006 subject matter of the disputes Arbitration mainly dealt with corporate matters (27%) and construction disputes (19%) and concerned distribution contracts(agency, distributorship, franchising, supply) in 10% of the cases. • 2 international proceedings • Panels of three arbitrators always preferred but in two cases • Average value of the dispute between € 100 000 and € 500 000 • 3 cases already concluded – the others are still pending (and for 3 of these the final award is expected by the end of August 2007)

12. Milan Arbitration practice 2004-2005: in 5 distribution cases the parties settled their dispute with the Arbitral Tribunal’s assistance within 6,5 months (average). Average value of the disputes was € 47 800. A Sole Arbitrator appointed by the Arbitral Council of the Chamber was preferred in 4 cases (selected also in consideration of their experience as mediators). The Arbitrators successfully attempted mediation at the hearings: - in 3 cases the parties agreed on a reduced amount of money to be paid by Defendants by installments. - in 1 case the Sole Arbitrator (who was a mediator at the Chamber) expressly conducted a mediation session and the parties agreed (minutes of the hearing) this not to be in contrast with their right of defense / due process principle, nor to affect the Arbitrator's independence. In 17 cases the parties reached an agreement before the constitution of the Arbitral Tribunal.

13. Mandatory mediation in Arbitration : An example In 1998 Claimant (an Italian company) and Respondent (a German manufacturer) entered into an agreement – subject to Italian law - to produce and supply chemical products. The agreement was in English and contained an arbitration clause referring to the Rules of the Chamber of Arbitration of Milan. The clause provided for a panel of three arbitrators, and for the arbitration to be conducted in Milan in English. A dispute arose in 2004 when Respondent gave notice of termination due to detrimental situations, which Claimant considered illegitimate. Hence, arbitration began. In Respondent's view, the agreement was to be qualified as a sub-supply contract under Italian Law June 18, 1998, No. 192: arbitration was to be put on hold and the dispute was subject to a mandatory mediation attempt to be carried out at the mediation service of the Chamber of commerce were the sub-supplier – here, Claimant – had its registered office (Law 192/1998, Art. 10).

14. The Arbitral Tribunal considered the assumption that the relationship between the parties followed the notion of “sub-contractor” (as defined by Law 192/1998) to be in line with the case at hand. • Accordingly, the Arbitral Tribunal – without any prejudice for its final decision – ordered the parties to promote mediation and asked the Secretariat of the Chamber to suspend the time limit set for the rendering of the final award (Art. 36.3 of the Arbitration Rules) until both or one of the parties had informed about the result of the mediation attempt. • Claimant's seat was in the North-East of Italy. The Milan Chamber hosted a mediation administered by another Chamber of commerce. • Mediation was successful, and the parties withdrew arbitration.

15. Milan Arbitration practice • The parties entered into a distribution agreement, whereby Claimant - a Greek company – was to buy and resell Defendant's products - an Italian manufacturer – in Greece exclusively. • The contract contained an express termination clause: namely, among others, Defendant was entitled to terminate the contract if Claimant failed to buy a certain amount of products agreed per year. • A dispute arose when Claimant did not buy the minimum amount agreed for 2003 (€ 74.472 instead of € 75.000). Respondent so considered the contract to be terminated (and gave notice in Jan. 2004) and did not supply the products lastly ordered by Claimant (Dec. 2003). • In Claimant’s view, facts did not justify such an earlier termination. Consequently, it initiated arbitration (Oct. 2004), seeking a declaratory decision of the ongoing validity of the contract, an indemnity for unfair termination and damages for the last order that Respondent did not carry out. Defendant objected these claims, and itself counter-claimed compensation for damages due to Claimant's poor performance. • The Sole Arbitrator rendered a final award in July 2006 according to Italian law and CISG (as agreed by the parties at the first hearing).

16. The Sole Arbitrator ruled that Defendant legitimately terminated the contract because of Claimant's failure to comply with the agreed obligations. According to CISG (Articles 11 and 29) parties are subject to no formal requirement when negotiating the terms of their own contract, thus it was in the parties' autonomy to set such a fixed amount as an essential condition (and Respondent provided evidence that the parties expressly negotiated that clause + they signed each page of the contract, so that both were fully aware of it). In so ruling, the Arbitrator also referred to Art. 1456 of the Italian Civil Code. Besides, the Arbitrator did not find that Respondent's conduct was unfair, as Claimant submitted. • On the other hand, the Arbitrator found that Respondent actually breached the contract, because it gave notice of termination in Jan. 2004 but did not supply the products that Claimant lastly ordered in Dec. 2003. • The Arbitrator denied the indemnity and compensation respectively claimed by the parties, as none of them proved that the said damages actually occurred.

17. In another arbitration at the Milan Chamber… • In 1999 the parties entered a franchise contract. The party agreed – among others - that the franchisor was not to sign other similar contracts for a certain Italian district (any breach leading to an express termination clause). • A dispute arose in 2004 when the franchisor claimed the payment of some outstanding invoices, and the franchisee (as Defendant) sought a declaratory decision of the termination of the contract and claimed damages because of the franchisor’s breach of the exclusive agreement. In Defendant’s view, the breach consisted of the fact that the franchisor sent brochures to some of the franchisee’s clients (seated in the exclusive district), inviting them to buy its products directly. • The Arbitrator denied a wider interpretation of the express termination clause. When negotiating this clause, the parties did not considered to list the case of the franchisor sending brochures to clients, thus this was not entailed as a reason to terminate the contract (strict interpretation). • On the other hand, in light of a good faith interpretation of the exclusive agreement, the franchisor’s behaviour was not consisted with it. Hence, the Sole Arbitrator acknowledged the claimed damages.

18. Conclusion • Arbitration features perfectly fit distribution sector needs • Key elements: well drafted arbitration clausesandqualified arbitrators • Institutional arbitration at the Chamber of Milan: a further step for a successful process in small disputes: • Model clauses and assistance for tailor-made clauses • Mediation service is just around the corner • Arbitration Rules' flexibility and parties' autonomy: applicable rules to the proceedings and to the merits of the dispute, seat and language of the arbitration, number of arbitrator/s (uneven) and ways of appointment • A Sole Arbitrator is appointed unless otherwise agreed by the parties • Time control: arbitration can still be a fast-track on itself, parties can set a time limit shorter than 6 months to render the award (but still in respect of the due process principle)