When considering whether to appoint a distributor in a foreign country, it is important to ascertain whether a distributor is entitled to any protection under the laws of that foreign country similar to those that agents benefit from under the European Council Directive EC/86/653 (“the Directive”).
Under the Directive agents, whose activities are to be carried out in the European Economic Area will have, in certain circumstances, the right to a compensation or indemnity payment following the termination of the agency agreement. There is no comparable directive in relation to distributorship agreements and most member states, including the United Kingdom, do not have domestic legislation in place specifically directed at distributorships. Instead, in most member states distribution agreements are regulated by the general principles of contract law. However, there are some countries that provide distributors with rights on the termination of the distributorship agreement similar to those which agents benefit from under the Directive.
In this article we highlight the rights enjoyed by distributors on the termination of a distributorship agreement in Belgium, Germany, Italy and Switzerland.
Under the Unilateral Termination of Exclusive Distribution Agreements for an Indefinite Term 1961 (“the 1961 Act”), substantial protection is given upon termination, in certain circumstances, to distributors engaged in a contract for an indefinite term. Under the 1961 Act terminated distributors are entitled to compensation for layoff costs, goodwill, and certain marketing and additional costs.
In addition, agreements for a fixed term automatically become agreements for an indefinite term on their third renewal.
Under the German Commercial Code (“the Commercial Code”) in certain circumstances the distributor may be entitled to payment for goodwill on the termination of the distributorship agreement.
A distributor must be integrated into the sales organisation of the supplier in the same way as a commercial agent in order to be entitled to a goodwill payment. To be considered as integrated into the sales organisation the distributor’s agreement will have characteristics typical of a commercial agreement. By way of illustration, the agreement may provide for:
- exclusive distribution;
- obligation to provide customer service;
- reporting obligations; and
- control and supervision by the supplier.
A distributor is entitled to a goodwill payment on termination of the distribution agreement if the supplier has acquired new customers and derived considerable benefit from this customer base. In addition, the distributor must show that he has lost income that he would have had through the customers acquired by him if the distribution agreement had continued in force.
The Commercial Code also provides for circumstances where the distributor’s right to a goodwill payment is lost. These circumstances include where:
- the distributor is not required to provide the supplier with his customers’ identities;
- the distributorship is a sideline;
- the supplier terminates the agreement for good cause due to the distributor’s conduct;
- the distributor terminates the agreement for reasons not justified by the supplier’s conduct.
When calculating the goodwill payment payable to a distributor, an upper limit exists of the annual average income of the distributor over the past five years.
Distribution agreements are regulated by the Italian Civil Code. Under the Civil Code a distributor is entitled to compensation in the event of termination of the agreement by the supplier. However, no compensation is payable where the distribution agreement is terminated due to the expiration of its term.
The distributor’s entitlement to compensation is limited to damages suffered, including loss of profits and costs incurred.
In 1962 the Federal Supreme Court ruled that Article 418u of the Swiss Code of Obligations, which provides for compensation to be paid to an agent upon termination of the agency, could, under special circumstances, apply to distribution agreements.
However, it was not until a decision dated 22 May 2008 that the Federal Supreme Court decided that Article 418u applied to a distribution contract providing for the distribution of perfumes in Slovakia and the Czech Republic. In this case, it was held that Article 418u applied insofar as the situation of the distributor is comparable to that of an agent. Such a comparison, the Federal Supreme Court held, was to be determined on a case by case basis.
Where a distributor is to be appointed within a foreign country, it is prudent to consider whether the distributor is entitled to any protection under the laws of that foreign country, either under legislation or case law. If a supplier fails to do this, it risks being liable to pay a compensation payment to the distributor on the termination of its agreement.
This article was written by Jane Spiers, an associate in the commerce and technology team at Fox Williams LLP.