When a trading relationship amounts to a distributorship

Does the nature of the relationship really matter? A recent judgment of a Spanish Court of Appeal brings home again how trading relationships can morph into a distributorship arrangement and the consequences which can follow.

In this case, the parties had a relationship which lasted almost four years. No written agreement was in place. In deciding the nature of the relationship, the Court of Appeal concluded that the relationship between the parties was on the basis of an unwritten distributorship agreement in contrast to a succession of purchase agreements. Various factors were taken into account, including:

1. the exclusivity of a particular geographical area;
2. the duration of the relationship;
3. continuity in the provision of products;
4. the fact that once the relationship had ended, a new company was appointed as distributor of the products; and
5. the fact that the manufacturer provided labels for the products.

Whilst ultimately it was decided that the distributor had been acting in breach of the distributorship agreement, had this not been the case the Spanish distributor would have been entitled to compensation from the manufacturer on termination.

This case follows on from other judgments of the English court and the European Court of Justice over the past few years where a finding that a distributorship agreement was in place meant that:

• The supplier was in breach of a failure to give proper notice.
  In a 2009 judgment it was decided that there was a distributorship agreement and that it was an implied term that the distributorship agreement should be terminable on reasonable notice. The court further decided, on the facts of the case, that the proper period of notice which should have been given was 9 months. As no such period of notice had been given, the distributor had a claim for damages against the supplier for the loss of such 9 month notice period.
• The distributor was entitled to compensation under its national law.
  In 2013 The European Court decided that the trading relationship between the parties amounted to an unwritten distributorship agreement. The distributor was based in Belgium where the national law provides protection to distributors on termination. As such, following termination of the relationship, the distributor sought an order for payment of compensation by the supplier under Belgian law.

These judgments highlight the risk faced by suppliers that a trading customer may over time be found to be acting as distributor and the unintended consequences which can follow.

Laura Monro