NEW RULES CONCERNING AUTOMOTIVE DISTRIBUTION: WHAT’S NEW UNDER THE SUN?
Last summer, a couple of months after the entry into force of the European Commission Regulation (EU) 2022/720 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, the Italian Parliament enacted an important provision on automotive distribution. Pursuant to Italian law dated August 8, 2022, no. 108, which converted the Italian Decree no. 68 of 16th June 2022, the Italian Parliament has regulated relevant aspects of the relationship between manufacturer, importer and distributor; aspects that had been (voluntarily?) neglected by the afore mentioned European Regulation. Below a summary of the most relevant developments.
The newly introduced rules concerning the automotive distribution have been established by the law converting the Italian Decree no. 68/2022. In particular, Article 7 quinquies establishes peculiar rules on the duration of dealer agreements signed between the manufacturer/importer and the dealer; it also regulates the terms of withdrawal from the contract and precise duties of information during the negotiations; finally, Article 7 quinquies provides new and severe compensation limits in the event of the early termination of the contract by the manufacturer or the importer.
These provisions appear to be particularly disruptive, so that the European Commission was supposed to deal with such issues, not the Italian Parliament. The European Commission approach would have favoured the harmonization of the regulations concerning such matters among Member States.
Instead, the result is a diversification of the Italian framework caused by the introduction of compelling provisions which seem to go upstream (as far as the legislative technique goes) compared to the previous European Regulations 330/2010 and 720/2022. Indeed, the latter Regulations established/establish the admissibility of agreements and agreed practices among enterprises, as long as they were/are not in contrast with the hardcore restrictions.
Art. 7 quinquies on the other hand, takes us back to a very strict regulation of the distribution agreements; it even mandates a minimum duration of five years for such agreements, which seems to retrace the so called “Monti Regulation” no. 1400/2002.
Nevertheless, let’s proceed with order.
Scope of application
Article 7 quinquies applies to vertical agreements between the manufacturer or importer and the authorized dealer and concerns the distribution of vehicles which are not yet registered or vehicles which have been registered by the authorized dealers for no more than six months and which have travelled no more than 6.000 kilometres (art. 7 quinquies para. 1).
Finally, a definition of “new vehicle”, which, in practice, includes “km0” vehicles and cars in general too. Note that the provision is very similar [or identical] to the definition of “new vehicle” established for intra-EU good purchases in order to calculate V.A.T. (Decree no. 331, 30th of August 1993, art. 38).
Dealership contract duration and withdrawal
The new VBER of June 2022 is silent on this matter, while art. 7 quinquies paragraph 2 expressly provides that agreements between the manufacturer/importer and the dealer “…shall have a minimum duration of 5 years…”. As a consequence, it still seems possible to stipulate an open-ended agreement, as long as they do not last less than 5 years.
The provision leaves some questions unanswered: if the contract has a duration of 5 years, is the automatic renewal still subject to the five years minimum period or can it provide a shorter term?
At the end of the first five years, if the parties do not expressly stipulate otherwise, does the contract automatically become open-ended?
As far as the withdrawal is concerned, it is clear that both parties shall be able to exercise such rights, which shall be done by means of a “…written note…” to be sent to the other party at least six months before the expiration date of the contract (the rules on duration and withdrawal are clearly based on the “Monti” Regulation no. 1400/2022).
Manufacturer and Importer’s duty to inform
During the negotiations leading to the dealership contract’s conclusion, the manufacturer/importer are required by paragraph 3 art. 7 quinquies to provide the Dealers with a list of information aimed at showing the actual risks (and earning chances) related to the agreement. Indeed, the provision states that the obligation to inform includes: “…all the information in their knowledge which are necessary to evaluate carefully the magnitude of commitments and their economic, financial and capital sustainability; including an estimation of marginal earnings expected from the commercialization of the vehicles…”.
Actually, a transparency obligation during the negotiations between parties is not something unheard of (see good faith principle – art. 1337 Italian Civil Code). Nevertheless, the said principle does not require the manufacturer/importer to provide the future Partner with possible earnings predictions.
What if such previsions turn out to be wrong?
Fair compensation in case of withdrawal from the dealership contract
Another important development relating to art. 7 quinquies is the inclusion of a fair compensation that the manufacturer or importer must pay to their Partner in case of early withdrawal from the contract.
Such compensation shall be quantified by taking into account the following considerations:
- a) investments made in good faith by the dealer in order to give execution to the agreement, as long as said investments have not been depreciated at the moment of termination of the agreement;
- b) the business start-up for the activities carried out during the execution of the agreement, also taking into consideration the turnover of the dealer during the last five years of validity of the agreement.
It is then specified that such compensation is not due the event of termination for non-performance of the dealer or withdrawal of the same (art. 7 quinquies para. 5).
Art. 7 quinquies of the D.L. 68/2022 is applicable to all the dealership agreements concluded after the 5th of August 2022; nonetheless, on the transitional framework uncertainties still remain.
THE HIGH COURT OF JUSTICE IN LONDON DECLARES THAT THE DERIVATIVE CONTRACTS ENTERED INTO BY AN ITALIAN LOCAL AUTHORITY ARE VOID AND UNENFORCEABLE.
On 14 October 2022, the High Court of Justice of England and Wales declared that the derivative contracts entered into by an Italian local authority with some banks in December 2007 are void and unenforceable (Case FL-2019-000012, ref. [2022] EWHC 2586 (Comm)). The High Court held that the municipality in question lacked capacity to enter into such derivatives as they were predominantly speculative and created additional debt for the local authority, which was not aimed at financing investment expenditure, in violation of Article 119(6) of the Italian Constitution.
This ruling is a significant turning point in English case law. In the vast litigation involving banks and Italian local authorities before Italian courts, some banks have turned to English courts both to resolve jurisdictional issues and to have the validity of swap contracts ascertained in advance to avoid the uncertainties of litigation threatened or pending in Italy. In contrast to the well-established approach of English courts which recognizes the validity of derivative contracts, by this decision, for the first time, the English judge declared the invalidity of swap contracts governed by English law and entered into by an Italian local authority based on the principles set forth by the Joint Divisions of the Italian Supreme Court in the decision no. 8770/2020.
In this case, the banks sought declarations before the English court that certain interest rate swap transactions they entered into with an Italian municipality on 21 December 2007 are valid and binding, and alternative relief in contract and tort if it was found that they are not. The municipality, for various reasons, sought declarations that the same transactions are not valid and binding (and relief in unjust enrichment), and alternatively relief in contract and tort if it was found that they are.
A crucial circumstance in this case was that the swap transactions restructured – inter alia – a previous derivative transaction entered into with a US bank. This position was early terminated against a payment made by the banks. The cost of the early termination, borne by the banks, was subsequently “absorbed” into the contractual terms of the transactions to the detriment of the municipality, significantly altering the contractual balances.
In particular, the invalidity of the contracts was argued on the basis of two main arguments: (i) the English court held that the contracts were speculative and as such the municipality lacked capacity to enter into such contracts, and (ii) it considered them as indebtedness for the municipality, indebtedness that was not used to finance investment expenditures, in compliance with Article 119(6) of the Constitution, but to finance the early termination of the previous derivative transaction.
i) As to the speculative nature of the contracts, based on an analytical and in-depth analysis of the abovementioned decision no. 8770/2020 as well as the Italian regulatory and case law framework and the English case law, the judge held that “an Italian court would clearly find that the Transactions were speculative“.
The judge found that the costs of winding up the previous derivative had had a significant negative impact on the contractual terms for the municipality. This would confirm the speculative nature of the transactions, which had a considerable negative MtM for the municipality (10.5 million) from the outset due to such costs that were subsequently ‘absorbed’ in the components of the new derivative.
Indeed, the collar component had a considerable imbalance in favour of the Banks: the value of the floor was five times the value of the cap; the floor was between 80 and 100 basis points higher than it would otherwise have been. The minimum interest rate that the municipality paid pursuant to the transactions was not aligned with the forward rate curve at inception, so the probability of the municipality losing money on the transactions was higher than the risks it would have assumed if only the underlying liability had been considered.
This led the English court to find that the transactions were “predominantly speculative”.
ii) The contracts had a further unlawful aspect. The transactions created additional indebtedness which was not used to finance investment expenditures as required by Article 119(6) of the Constitution.
According to the judge, it is not sufficient, as the Banks contend, to argue that the previous derivative transaction was issued to finance expenditures, and that the costs of termination of the previous swap were paid as part of a transaction undertaken to restructure that debt, but he considers such costs as an upfront payment, embedded in the transactions, which, according to the principles of the decision no. 8770/2020, were the loan element. The upfront rendered the transactions a recourse to indebtedness, that was not entered into for the purpose of financing investment expenditures, as required by Article 119(6) of the Constitution, but in order to meet the winding-up costs of the previous derivative transaction. For this reason, the court held that the transactions contravened Article 119(6) of the Constitution.
The predominantly speculative nature together with the unlawfulness of the additional indebtedness created by the derivatives led judge Foxton to declare the invalidity of the swap contracts. The municipality lacked capacity to enter into the transactions since Italian local authorities are not allowed to enter into speculative transactions or to have recourse to indebtedness otherwise that for the purpose of financing investment expenditures.
It is interesting to note that although the municipality is entitled to restitution of the amounts paid to the banks under the transactions, the judge allowed the banks to rely on a defence of change of position in respect of payments made under the “back-to-back” hedging swaps.
According to this defence, which in principle is not available as a matter of Italian law, it would be inequitable to make full restitution of the undue amounts since, after the derivative contracts were entered into, the banks’ position changed due to the hedging transactions.
According to the judge, this defence will temper some of the consequences which would otherwise flow from the decision issued by the Joint Divisions no. 8770/2020, “a legal development in 2020 leading to a transaction which both parties had treated as binding for nearly 13 years being held to be void from the outset”.
We will see if and how such a defense will make the recourse to English courts more favorable for banks in claims for nullity of the swap contracts entered into with Italian local authorities.
m.divincenzo@macchi-gangemi.com
ENERGY NEWS – DO AUTHORITIES TAKE PRICE VOLATILITY ON ENERGY SERIOUSLY?
On 22 September 2022 the European Securities and Markets Authority (ESMA) (ESMA 24-436-1414) commented on the volatility of energy derivatives markets, clarifying that:
– recent geo-political and market developments have fostered a significant increase in prices and volatility in energy markets;
– consequently said price and volatility increases have led to substantial enhancement in the margins required to hedge the related exposures of traders;
– there are liquidity strains on non-financial counterparties, forcing them to reduce their positions or leaving them inadequately hedged and, therefore, exposed to further price changes.
In this situation ESMA and national competent authorities will be called upon to cooperate to counter any threats to market integrity and will investigate any potential signals of market manipulation. ESMA suggests measures to contain excessive volatility in order to improve the functioning of the markets.
The European Authority suggests, inter alia, implementing – on a temporary basis and for the energy derivatives market only- a mechanism to contain volatility. These are so-called “circuit breakers” (referred to in Article 48 of Directive 2014/65/EU, so-called MIFID II), which are temporary measures that halt trading so that more time can be provided for market participants to process the flow of information during extreme market stress scenarios. Circuit breakers are tools to be adopted only for limited periods and in exceptional circumstances, such as extreme volatility spikes that could lead to disorderly trading conditions. Such instruments would allow the price formation mechanism to resume in an orderly manner and, hopefully, decrease volatility in the markets. ESMA does not rule out that further regulatory interventions may be needed in order to clarify the functioning mechanism of circuit breakers, reduce the discretion of trading venues, and possibly introduce new tools to increase market transparency.
Regarding the operation of margins, in ESMA’s view, the increase in margins has led to greater difficulties especially for non-financial market counterparties, related to lower liquidity, resulting in reduced hedging activity and thus, their greater exposure to risk. What has been said, however, is not a criticism of the usefulness of the margin mechanism, which is functional to the resilience of Central Counterparties (i.e., to the legal entities that interpose themselves between counterparties to contracts traded on one or more financial markets by acting as buyer to each seller and as seller to each buyer).
Anyway, as regards collateral, ESMA considers it appropriate to provide specific mechanisms for energy markets in view of recent developments in those markets. On the clearing thresholds (referred to in EU Regulation 2019/834), the Authority continues to consider as valid the suggestions already made, increasing the threshold from 1 billion to 4 billion.
About the new measures, ESMA believes it is necessary to introduce supervisory mechanisms to increase transparency and a proper risk assessment. In particular, to provide financial regulators with better visibility on energy products, ESMA suggests:
– increasing reporting requirements on OTC (“over the counter”) transactions by cancelling the exemption contained in EMIR relating to transactions executed between companies belonging to the same non-financial group and
– introducing new reporting requirements also on wholesale energy products (which do not qualify as financial instruments under MiFID), which are settled by physical delivery and are not covered by transparency and reporting requirements under either MiFID II or EMIR; as well as
– regulating and supervising traders active on the commodity derivate markets and which behave like investment companies, in order to have the largest entities licensed and supervised as investment companies. It is worth noting that this last suggestion is mostly disruptive because it aims at applying the strict requirements set by financial regulation for the investment companies while as of today the same traders may execute and carry out investment services on commodity derivatives without being authorized as investment firms (pursuant to the “ancillary activities exemption” contemplated by MiFID II and based on the principle that as long as a non-financial entity’s trading activity remains ancillary to its main business activity, it is not subject to the same requirements as an investment firm).
s.dellatti@macchi-gangemi.com
g.pappacena@macchi-gangemi.com
THE SUPREME COURT OF CASSATION RETURNS TO RULE ON THE INTERPRETATION AND SCOPE OF ARBITRATION CLAUSES.
With Ruling No. 31350/22, filed on 24 October 2022, the First Civil Section of the Court of Cassation returned to rule on the interpretation and scope of arbitration clauses included in contracts.
In the case submitted to the Court’s consideration:
– the literal wording of the clause was the following: “Any dispute that may arise with regard to this contract, either with regard to its interpretation, or individual clauses, or with regard to its performance, shall be decided by an arbitration board”;
whereas
– the claim brought before the arbitral tribunal was for compensation for non-contractual damages, albeit related to the performance of the contract in which the arbitration clause was included.
The arbitration award (pronounced in November 2013 and awarding damages) was appealed by the losing company before the Court of Appeal on various grounds, including, primarily, the lack of jurisdiction of the arbitrators (who had ruled outside the limits of the arbitration clause).
The Court of Appeal held, however, that the issues of non-performance, termination and compensation for damages were also within the scope of the arbitration clause and therefore dismissed the appeal.
Almost ten years after the award, the Supreme Court ruled in favor of the plaintiff, excluding the arbitrators’ jurisdiction to rule on the claim.
The judges held, in fact, that the arbitration clause that generically refers to disputes arising from the contract must be interpreted, in the absence of an express intention to the contrary, as meaning that only disputes having their ground (“causa petendi”) in the contract itself, shall fall within the jurisdiction of arbitration.
Since the action brought before the arbitral tribunal was an action in tort (and, therefore, referring to the contract only as historical background, but not as its basis), the Court held that the jurisdiction of the arbitrators did not exist.
In support of its ruling, the Court of Cassation then referred to:
– Cass. No. 23088/2007, according to which the clause deferring to arbitrators the disputes concerning the interpretation and performance of the contract is not applicable to the claim for damages. However, when there are several related claims, with only some falling within the jurisdiction of arbitration, the latter is absorbed and excluded by the ordinary jurisdiction;
and
– Court of Cassation No. 3795/2019, according to which, in the absence of an express intention to the contrary, an arbitration clause must be interpreted as attributing to arbitral jurisdiction all disputes that have their ground (“causa petendi”) in the contract in which the clause is inserted.
The wording of the arbitration clause is therefore of decisive importance in determining the jurisdiction of the arbitrators.
This was also recently pointed out by the Section Specialized in Corporate matters of the Court of Milan, which, in its ruling of 8 January 2020, held that a dispute of extra-contractual nature was also within the scope of arbitration by virtue of the wording of the arbitration clause included in the contract (which reads as follows: “any dispute, controversy or disagreement shall be settled by arbitration in Milan in accordance with the rules established by the Chamber of Arbitration of Milan, of which the parties acknowledge that they are aware. The board will be composed of three arbitrators appointed by the Arbitration Chamber.”)
Therefore, “Rem tene, verba sequentur” (i.e. ‘focus on the concept, words will follow’, cit. Catone).
THE NEW PROPOSAL TO REFORM DATA PROTECTION AND PRIVACY REGULATIONS IN THE UNITED KINGDOM.
On 18th July 2022, the Data Protection and Digital Information Bill (Bill 143 2022-23) was introduced in the British House of Commons. If enacted, this new bill would amend the current rules on data protection and privacy in the United Kingdom (UK), by easing the burden on operators.
The second reading of the bill, which was scheduled for 5th September 2022, was postponed due to the sudden change in the leadership of the UK government, that saw Liz Truss taking over from Boris Johnson; in the meantime, Rishi Sunak replaced Liz Truss in government. In an official note, the new executive announced that the postponement was essentially due to the decision to give the new team of ministers the opportunity to analyse the issue and the bill itself in greater depth. As a consequence, as of today, it is clear the UK’s intention to change the data flow management regime inherited from the European Union (GDPR), whereas the form that this initiative will take in practice is not yet defined. The new bill does not aim to make a tabula rasa of the European discipline, but intends to push the latter towards a regulatory liberalisation and simplification while still ensuring high standards of protection and security.
The project looks very ambitious and, to date, it is difficult to predict its success since the bill is still at a preliminary stage, considering that it was only submitted for a first reading in the House of Commons. Nevertheless, the goals the British government wants to achieve were openly stated in the Impact Assessment conducted by the Department for digital, culture, media and sport (DDCMS) published on 6th July 2022. More precisely, the bill aims to create a data protection regime that:
1) Supports and promotes competition and innovation in a way that fosters economic growth;
2) Maintains high standards of data protection without creating unnecessary obstacles;
3) Keeps pace with the rapid innovation of data-intensive technologies;
4) Helps businesses in using data responsibly, without uncertainties or risks, both in the UK and internationally;
5) Makes it easier for public bodies to share vital data, improving the delivery of public services.
In concrete terms, the bill, to realise the above objectives, proposes the following major innovations:
1) A new regime on the review of data access requests, so-called ‘DSARs’ (DSARs are requests made by individuals to know which of their personal data have been collected by a particular organisation). Specifically, the aim is to allow organisations to refuse ‘vexatious or excessive’ DSAR requests or charge a fee for replying. This would depart from the EU’s current GDPR framework, which requires organisations to respond to all requests except to those that are ‘manifestly unfounded’.
2) A new accountability regime. Indeed, the bill proposes the replacement of ‘Data Protection Officers’ with ‘Senior Responsible Individuals’ (SRIs). SRIs must be members of the organisation’s management. The SRI will have to carry out security assessments of data processing based on the risk posed by the individual processing operation. This would allow privacy to be managed more flexibly, taking into account the specifics of the activities carried out by each single organisation, as well as the nature of the data processed. In addition, foreign organisations subject to the extraterritorial provisions of the new bill should no longer need representatives in the UK.
3) A new regime on the regulation of cookies. Consent requirements for cookies would be relaxed in certain circumstances, minimising the ‘pop-up’ consent requests that appear to internet users on a daily basis;
4) A new definition of personal data. The bill proposes a new section that would limit the definition of personal data to the circumstances characterising every specific data transfer. Thus, data would be considered to be personal in the following scenarios:
(a) The controller is able to link and identify a person through the processing of information;
(b) The controller knows or should know that the third party receiving the information following the transfer might be able to identify the person to whom the data belong.
It is therefore evident that the proposed amendment would confine the assessment of the identifiability to the controller and the third party receiving the data following the transfer, departing from the ‘anyone in the world’ criterion, currently envisaged by the GDPR. This is an often-debated point, although the proposed amendment only seems to implement the position that the CJEU took in Patrick Breyer v. Bundesrepublik Deutschland in 2016;
5) A new discipline for international data transfers. The DDCMS will have much more discretion in determining whether a foreign jurisdiction offers a comparable level of protection to that guaranteed by the UK data processing legal framework. If so, the UK will be free to establish free data trade regimes with new jurisdictions by issuing ‘adequacy decisions’.
It is exactly this last point to raise the greatest concerns. After Brexit, the EU issued an ‘adequacy decision’ towards the UK under which free trade of data was maintained between the two.
The fact that the UK may in the near future, in its attempt to liberalise its data protection regulation, recognise as adequate jurisdictions that the EU does not consider as such, could push the latter to revoke the ‘adequacy decision’ mentioned above. If this were to happen, the impact of disrupting the free exchange of data with the EU would cost the UK an estimated £210 million to £410 million in lost revenue from data exports. These losses would outweigh the gains that the reform would bring, which, in the DDCMS Impact Assessment, were estimated to be between £80 million and £160 million per year.
Likewise, it could also be the case that the reform currently being approved by the UK will lead to a simplification of requirements for operators and that, if this ensures a good level of protection for personal data, the EU may take some cues from it in the next updates of the legislation.
At the moment, all that is left to do is wait for the first moves in this regard by the government led by Rishi Sunak.
s.macchi@macchi-gangemi.com
p.marangoni@macchi-gangemi.com
THE “SPECIAL TAX REGIME FOR INBOUND WORKERS” APPLIES TO THE CEO OF A FOREIGN HOLDING COMPANY WHO COMES BACK TO ITALY AS A DIRECTOR OF AN ITALIAN COMPANY BELONGING TO THE SAME GROUP.
By Ruling no. 524 of October 25, 2022, the Italian Revenue Agency affirmed that the “special tax regime for inbound workers” introduced by Article 16 of Legislative Decree No. 147 of September 14, 2015, also applies to the CEO of an English holding company who intends to transfer his tax residence to Italy to (a) to assume the role of director of an Italian company within the same group, and (b) develop the business of the same company in the Italian territory.
Article 16 of Legislative Decree No. 147/2015 paragraph 1 states that the special tax regime (which entails a 70% exemption of taxable income, subject to exceptions) is available to workers who transfer their residence to Italy and who meet all the following conditions:
– they must not have been tax residents in Italy during the two fiscal years preceding the abovementioned transfer; and
– they undertake to reside for tax purposes in Italy for at least two years; and
– the activity must be carried out mainly in the Italian territory.
Such regime is available to taxpayers for five years starting from the fiscal year in which they transfer their tax residence to Italy, pursuant to Article 2 of the TUIR, and for the following four fiscal years, subject to extension for five additional years.
Official clarifications on the subjective and objective conditions requested to access the special tax regime were provided by Circular No. 33/E of December 28, 2020, where, among other things, it was underlined that the inbound expatriate workers regime does not require that the activity be carried out for a business operating in the territory of the State. In addition, Ruling No. 72/E of September 26, 2018, referred to in this Agency’s reply, clarified that: “the autonomy of contractual relations within a corporate group having different companies located and operating in different States does not exclude, upon the occurrence of all the other conditions required by the rule in question, the possibility to access the special tax regime for inbound workers, with no relevance to the circumstance that the work activity has been carried out with companies belonging to the same group.”
***
In his request for Ruling, the applicant sustained the abovementioned regime would be applicable – from fiscal year 2023 (i.e., the fiscal year of transfer of his residence for tax purposes in Italy) – notwithstanding:
– he would maintain the role of CEO of the English company, which has not an employment relationship nature; and
– in the past years, he was – at the same time – director of the Italian company as ancillary activity to that of CEO of the English company.
The Revenue Agency adhered to the interpretation of the applicant. In conclusion, it has considered that the special tax regime for inbound workers applicable also in the case at hand, is not precluded by the circumstances that (a) the applicant will retain the role of CEO with the English company, and that (b) he previously held the position of director of the Italian company prior to the transfer to Italy.
a.salvatore@macchi-gangemi.com
f.dicesare@macchi-gangemi.com
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