Excessive advanced payment validates the license agreement termination

On June, 23 2016 the Court of Milan ruled that selling goals in a licence agreement are a mere business prevision and, even if mendacious, do not allow the licensee to terminate the agreement. However the Court can reconsider royalties advanced payment dues if clearly disproportionate compared to what actually obtained from the licensor during the first contractual year.

The Licensor signed a license agreement with an elastic tights maker regarding the manufacturing and sale of graduated compression tights.

According to the agreement the licensor should have handled the orders and licensee the production. As advance payment on future royalties the licensee committed to pay € 50.000 to the licensor in two instalments, the first one upon signing the agreement and the other one within 10 days from the receiving of the first orders. A business plan including a three years prevision of goods production and selling and an annual sales volumes prevision were attached to the agreement.

Afterwards, the licensor placed a € 8.000 order only and the licensee refused to pay the advanced, alleging the licensor’s breach to the agreement.

The Court of Milan ruled on the licensor’s breach ordering the company to return the advanced payment apart from the royalties due with regard to the order actually acquired.

For the Court the orders gained by the licensor did not justify the amount of the advanced requested to the licensee and thus its refusal to pay was lawful.

According to the Court the agreement is based on the information shared by the parts in order to make the agreement functional for both. Under articles 1366 and 1375 Italian civil code the agreement has to be interpreted and executed in good faith and thus protecting the mutual advantage that lead the parties to sign the agreement.

Therefore the licensor can not pretend an excessive advanced payment compared to the amount of orders actually obtained. The decision is in line with the Supreme Court previous case law which states that breach of law occurs when, even in the absence of formal bans, the owner exercises his right unfairly and in bad faith causing an excessive and unjustified sacrifice of its contractual counterparty (Supreme Court ruling n. 10568 07/05/2013).

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Studio Scarpellini Naj-Oleari & Associati

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