Drafting Earlier Termination Clauses Silvia Bortolotti Buffa Bortolotti & Mathis (Italy) IDI 2007 Annual Meeting Vienna, June 2007

Purpose of the clause: BUFFA, BORTOLOTTI & MATHIS To terminate the contract with immediate effect: - in case of a serious breach by one of the parties, or - where exceptional circumstances arise

Applicable law BUFFA, BORTOLOTTI & MATHIS Parties are normally free to agree on the events that will justify the termination, within certain limits Often courts are entitled to judge on the importance of the event, which has given rise to termination Courts may assess damages, if the termination was not justified

Breach BUFFA, BORTOLOTTI & MATHIS Serious breach: act or omission of a party which would make it unreasonable to require that the innocent party continues the contractual relationship Minor default: prior warning and additional period for remedy (grace period) A repeated default may be considered a serious breach

IDI Agency Model - balanced BUFFA, BORTOLOTTI & MATHIS 18.2(Substantial breach). Any failure by a party to carry out all or part of his contractual obligations resulting in such detriment to the other party as to substantially deprive him of what he is entitled to expect under the contract, shall be considered as a substantial breach for the purpose of Article 18.1 above. 18.3(Specific cases of substantial breach). The parties hereby agree to consider in principle, unless the contrary is proved, as a substantial breach of the contract the violation of the provisions under Articles Moreover, the violation of any other contractual obligation may be considered as a substantial breach, if such violation is repeated notwithstanding a request by the other party to fulfil its contract duties.

Example of clause (Civil law style) BUFFA, BORTOLOTTI & MATHIS Each party may terminate the present contract with immediate effect, in case of occurrence of an important event constituting a justifiable reason for the contract termination, by written notice sent by registered mail with return receipt. A justifiable reason for the contract termination is any violation of the contract obligations that is of sufficient importance not to allow for the continuing of the relationship on a reciprocal confidence basis. The parties jointly declare that the violation of the provisions under articles of the present contract is to be considered as a justifiable reason for the contract termination.

Example of clause (Anglo-American style) BUFFA, BORTOLOTTI & MATHIS Either party to this Agreement shall have the right to terminate this Agreement on thirty (30) days’ written notice to the other if the other party then be in default or breach of any material provision hereof; provided, however, that if the party receiving such notice of termination shall cure the breach or default within such 30 days period, or within such period, shall be proceeding diligently to cure such default and does in fact cure such default within an additional 30 days period, this Agreement shall continue in full force and effect. (…) Manufacturer shall also have the right to terminate this Agreement if the minimum purchase or royalty provisions of this agreement (as the case may be) are not met by Distributor.

Example of clause (Anglo-American style) BUFFA, BORTOLOTTI & MATHIS Termination Due to Default. Either party may terminate this CONTRACT with immediate effect upon written notice thereof in case of a breach by the other party of its contractual obligations, including without limitations a breach of the provisions contained in Articles [...] of this CONTRACT, or in the event either party hereto defaults in any of its duties, obligations or responsibilities hereunder and such default shall not have been cured within a reasonable time after having been invited in writing to do so by the other party. Such termination shall be effective immediately upon notice being given as provided in Article 20.1 hereof. A termination by MANUFACTURER due to DISTRIBUTOR’s default shall be identical in legal effect to a termination by MANUFACTURER for cause (except that if a termination is due to default there is the right to cure described in this Article and if the termination is for cause, there is no right to cure and termination is effective immediately upon notice). Upon a termination by DISTRIBUTOR due to MANUFACTURER’s default, the parties will proceed in accordance with Article 20.1a.

(continue) BUFFA, BORTOLOTTI & MATHIS Termination for Cause by MANUFACTURER. MANUFACTURER may, at its option, by written notice to DISTRIBUTOR, terminate this CONTRACT effective immediately, if any of the following occurs: (a) DISTRIBUTOR fails to maintain a service facility adequate to meet the needs of owners of Products within the Territory (in Manufacturer’s sole opinion), (b) DISTRIBUTOR fails to meet any sales quotas, purchase engagements or other requirements relating to sales and service established by MANUFACTURER, from time to time (whether set forth in the Manufacturer’s Dealer Manual, or in a Manufacturer’s memorandum), for the Territory, which quotas or engagements may be modified in MANUFACTURER’s sole discretion, (c) DISTRIBUTOR sells or attempts to make a sale in bulk and not in the ordinary course of business of all or any substantial portion of its purchases from MANUFACTURER, (d) DISTRIBUTOR sells or attempts to sell Products to individuals, companies or organization trading in [...], outside the Territory, (e) DISTRIBUTOR fails to secure, maintain or renew a license required by any State or jurisdiction where this CONTRACT is to be performed or such license is suspended or revoked for any reason, …

(continue) BUFFA, BORTOLOTTI & MATHIS (f) DISTRIBUTOR assigns or attempts to assign this CONTRACT, or any interest herein or any right hereunder, without MANUFACTURER’s written consent, (g) DISTRIBUTOR’s establishment remains closed for the conduct of sales or service operations during regular business hours for more than five (5) consecutive days, (h) any dispute, disagreement or controversy shall arise between or among Principals, managers, officers or stockholders of DISTRIBUTOR which, in the opinion of MANUFACTURER, could adversely affect the operation, management, reputation, business or interest of DISTRIBUTOR or the business or interest of MANUFACTURER or the reputation of the Products, (i) DISTRIBUTOR falsifies any records or reports, (j) any submission by a DISTRIBUTOR to MANUFACTURER of a false or fraudulent application or claims or statements in support thereof for reimbursement for warranty, special policy or campaign adjustments performed by DISTRIBUTOR for parts, service or promotional compensation or for any other discount, allowance, refund, or credit under any other of MANUFACTURER’s programs, (k) (……)

Exceptional circumstances BUFFA, BORTOLOTTI & MATHIS Circumstances which would make it unreasonable to require that the innocent party continues to be bound by the contract Normally: death, serious illness, incapacity, bankruptcy or other similar procedures, criminal sentences, change in the legal structure of the agent/distributor company

IDI Agency Model - balanced BUFFA, BORTOLOTTI & MATHIS 18.4(Exceptional circumstances). Circumstances in which it would be unreasonable to require the terminating party to continue to be bound by this contract, shall be considered as exceptional circumstances for the purpose of Article 18.1 above. The parties agree to consider as exceptional circumstances which justify the earlier contract termination by the other party the following situations: bankruptcy, moratorium, receivership, liquidation or any kind of composition between the debtor and the creditors, or any circumstances which are likely to affect substantially one party's ability to carry out his obligations under this contract. (…)

(continue) BUFFA, BORTOLOTTI & MATHIS 18.5(Change of control, ownership and of management). If the Agent is a company, this contract may also be terminated by the Principal with immediate effect at the occurrence of a material change of the legal structure, of the shareholders or of the management of the Agent company, carried out without the prior consent of the Principal, and particularly where one of the persons indicated in Annex H ceases to have the position therein indicated or anyway ceases to personally take care of the relationship with the customers. The Principal shall not unreasonably withhold his authorisation to the above changes, especially if the Agent gives adequate warranties that the changes will not affect the Agent’s ability to carry out his contractual obligations in the most effective way.

Example of clause (Civil law style) BUFFA, BORTOLOTTI & MATHIS The following events shall also be considered as justifiable reasons for contract termination: bankruptcy, any kind of composition between the bankrupt and the creditors, death or incapacity of the agent, civil or criminal sentences which may affect his reputation or hamper his activities, as well as any important change in the juridical structure or in the management of the agent company. In particular, it is understood that the manufacturer may immediately terminate the contract from the moment when M shall cease to be of the agent company.

Notification of the termination BUFFA, BORTOLOTTI & MATHIS Term for notifying the termination: - specific term required by law - “reasonable term” Form for notification (registered letter)