Even Abogados has defended a foreign manufacturer distributing its products in Spain with a local agent/distributor. The agent/distributor (based in Spain) sued our foreign client (the Manufacturer) claiming for the goodwill indemnity foreseen in Article 28 of the Spanish Agency Act. First Instance Court has accepted our arguments basically due to the lack of evidences produced by the plaintiff. Our intention is not to discuss about the burden of proof as general legal principle but to expose some clues in order to better prepare a similar procedure.

The facts

Mr “A” (the Agent) and the Manufacturer had a non-written agreement since long time ago. In 2000 the agent/distributor (a company owned by Mr “A”) and the Manufacturer signed a written contract transforming and substituting the old relationship.

After a period of more than five years, the Manufacturer gave a previous notice to terminate this contract. The agent/distributor then claimed the goodwill (clientele) indemnity as a consequence of this termination.

The debate

One of the discussion elements (quite frequent) was to determine if we faced an agency or a distribution agreement. The problem in this case was probably more a theoretical tan a real one due to the fact that although goodwill indemnity is expressly foreseen at the Agency Act, it is also admitted by analogy in distribution agreements. The question was, therefore, to justify its applicability. Let’s assume (as in the Court judgement) that it was an agency agreement.

Article 28 of the Agency Act (in similar terms to Article 17 of the EC Directive 86/653 of December, 18^th) states that an agent is entitled to an indemnity for customers he brought to the principal (the Manufacturer in our case) or with whom significantly increased the volume of business and provided the principal continues to derive substantial benefits and the payment of this indemnity is equitable due to special circumstances. The amount of the indemnity may not exceed the agent’s average annual remuneration over the preceding five years.

The conclusions

Goodwill indemnity benefits the agent but it is also his responsibility to prove to the Court the necessary elements in order to obtain it. In our case, First Instance Court has rejected this indemnity due to the complete absence of evidences of the main elements. The judge has stated clearly the following:

1. No invoices related to dues-but-not-paid commissions have been showed during the procedure.
2. The plaintiff (the Agent) has not proved to which services these invoices were due, the invoiced company, the commissions’ rate applied, the date from which they were due, if the activity had been correctly ended, if the sales were related to machinery or to spare parts…
3. A document called “accounting statement” (estado de cuentas) has been prepared by the plaintiff himself but has expressly been contested by the defendant (the Manufacturer): this does not show his current situation.
4. The judge did not accept the goodwill (clientele) indemnity because no invoices attesting the collection of commissions have been presented, or have been produced in foreign languages without translation into Spanish.
5. The only references to these invoices made by the accounting expert in his report to the Court are not enough considering that he does not include them in the report.
6. The “clients” included in such clientele were not proved neither it was the existing commercial relationship.
7. There is a complete lack of evidence concerning the increasing of profits that will still benefit the Manufacturer in the future or receive from possible new clients.
8. Concerning the indemnity for the budgets prepared by the agent at the end of the relationship but not still accepted by the Manufacturer these were not proved, including the alleged orders sent by the Manufacturer.
9. The previous relationship with the agent (Mr. “A”) has nothing to do with the current situation, nothing is said about the clients presented by him, his contractual relationship was substituted by the agreement with the new company, and in case of goodwill indemnity, if applicable, this was to be calculated on the basis of the five previous years without considering the previous relationship.
10. The only documents produced by the plaintiff were the signed agreement and a report prepared by an expert but which does not seem to be very trustable considering that the expert modified his conclusions during the trial.

Mediation is the great unknown. It works with great success in other countries and here it is frequently disqualified, even in specialized areas, with arguments that reveal that it is not known what it is.

Preambles of our laws praise its benefits and they declare their firm intentions to promote it, but the reality shows that only some private institutions and some judges with a deep vocation to satisfy the parties’ interests bet on it with determination.

The truth is that when the mediation is thoroughly known, its promotion and impulse are usually sought.

Conflicts of trading companies with their clients are an ideal field for testing mediation. Often the interest of this type of companies goes far beyond recovering an amount in short term and they start judicial procedures that could even exceed the amounts at stake.

Online trading companies cannot attract professional investors with a profile of default and insolvency and who know how to surround risk control systems to make large investments leveraged without funds to respond.

In this context, the mediator will be an effective assistant so that the parties can get to better know and understand each other true interests.

A mediation clause in an options and futures agreement could probably avoid endless and uneconomic procedures that, in addition to eroding the justice administration system, put the clients in a position to withstand up to ten years of unnecessary judicial conflict.

Relationships in which people intervene will lead, sooner or later, to major or minor conflicts. In business relationships, companies try to minimize in their contracts (when they sign them) what can happen in case of discrepancies. But, even if these are essential, it would be naive to think that a contract will give us the solution to any conflict. No matter how many eventualities have been foreseen, the management of the conflict will always go further. How to act, then? How to be prepared when the discrepancies begin? I will present some guidelines from our experience managing and helping to avoid and to resolve conflicts. And although I’m going to focus on those that occur between companies (or among the people of those companies), what I will say could be extrapolated to almost any type of difference.

1. Identify that you are facing a potential conflict

A conflict arises when there are expectations that are not met: the agent seems not to respond as expected, the entrepreneur does not provide what was promised, the product stops covering expectations, the service is no longer adequate. Or we simply want to change the supplier, replace the distributor… the list is endless.

In any of these situations the conflict is just around the corner and, although it is necessary to realize it as soon as possible, it is not always perceived with clarity. Any discrepancy is possible source of conflict and the first thing necessary is to verify where we are and its severity. The steps we will take immediately after will depend on this verification and the time it occurs.

2. Do not react impulsively

In a situation of potential conflict, the most usual is to react: grab the contract and try to see where I am right, what can I argue to reaffirm my position, how to impute responsibility to the other party. But when we react impulsively we renounce our capacity for conviction and persuasion. For many reasons that we think we have, a relationship or a contract have multiple interpretations and nuances that can vary the conclusions and the results.

When a manufacturer of bakery products decided to change their distribution system (potential conflict), he sent all his wholesalers a letter “resolving the commercial relationship” that they maintained (reaction). With a letter of just over two lines, he dug his own judicial grave since the judges considered that what was resolved was a distribution contract and not the annual price conditions that applied, and recognized the wholesalers a goodwill (clientele) compensation.

When a footwear manufacturer, in a change of commercial strategy (potential conflict), unilaterally resolved a long-term agency contract by imputing a supposed inactivity of the agent in his country (reaction), he did not take into account that in other comparable countries the situation was identical and that the decrease in sales was due more to the generalized crisis than to the poor performance of the agent. The alleged resolution for fair cause was not admitted and he had to pay compensation.

When another manufacturer of components for boats was not satisfied with the performance of his agent (potential conflict), he simply decided to sell his products through another representative (reaction) without taking into account the exclusivity granted to the first one and without having warned him properly.

All these reactions are understandable, but none was sufficiently thought out and in all cases we have had headaches as lawyers when defending them before judges and courts. An advice and previous strategies would have avoided many difficulties, would have saved much time and money to the parties and would have had a result without a doubt much more satisfactory.

3. Seek advice immediately

Although nobody better than you knows your business, nobody better than someone external can help you to manage with an adequate perspective the conflicts that are arising.

We have all certainly negotiated and we all feel legitimized to do so, but we are not always able to identify confluent interests or to manage the emotions (our own and those of others) that any conflict entails. External aid is essential, and the sooner you get there, the better.

If the footwear manufacturer imputes to the agent his loss of confidence in the product and a poor performance in the territory and on that basis he decides to terminate the contract, the temptation of the “injured agent” is to respond to the principal with sales figures, arguments, explanations about the clients, to impute the principal’s internal disorganization… Those answers and that information, even though they may be true, could turn to the agent if, for example, he admits something that he later regrets, he gives information that the entrepreneur did not have or he recognizes his weaknesses. And that happens almost always! In addition, it is very frequent that in this phase the parties involved are the ones in the conflict acting on their own, without any objective help, and committing, most of the time, more errors than are desirable.

However, from our experience, we have observed that an external consultant to the relationship and with sufficient competence in the matter discussed, in the potential litigation and its possibilities, and with the skills to negotiate objectively, can suggest a strategy, help to understand the interests that exist, how to approach them better and which method of solution is best suited

4. Design an action strategy

Indeed, facing any potential conflict, in any situation of discrepancy, as insignificant it may seem initially, the vision in the medium or long term from the first moment in which it originates is crucial. It does not do any good to react if it is not within the framework of a properly strategy designed in advance.

I like to remember those letters that were sent demanding a debt of 1,000 and to which the alleged debtor replied that they were not 1,000 but 900 offering a recognition of the debt that, otherwise, would have been more difficult to prove.

A response to a letter in which we are accused of a breach may be the best or the worst ideas depending on what the next steps are. What are the true interests beyond the concrete position at that time? Should I continue to maintain the commercial relationship? If it is not adequate, is it possible to reform it? Is it still viable? Am I interested in resolving the conflict as soon as possible to continue dedicating myself to my productive / commercial activity? What perspective of time, money, energy, reputation … entails embarking on a judicial / arbitral process? What alternative ways are there? These are some of the questions that every person has to ask themselves in order to strategically solve the conflict.

5. Do not threaten, act with a head.

Normally when the conflict has begun or when it is in its early stages, it is usual to threaten to go to court (warnings of the type “we will have no choice but”, “we will be forced to” are the formulas that hide such reaction). This is usually a bad idea. First, because threatening —depending on how it is done— could even be a crime. But, in addition and above all, because it usually closes more doors than it opens.

The solution to the conflict may come, indeed, from a judge (or arbitrator) who imposes it, but it is not the only way and probably, if we follow this path, it will not leave anyone happy. The negotiation assisted from the beginning by a professional that helps to alleviate the emotional burden and to know alternatives, or the mediation (the intervention of a neutral professional that helps to understand interests and bring positions of the parties so that they themselves, with the mediator’s help, can find a solution) are almost always better solutions. The threat will put the other party on a defensive position and in a sort of way it constrains us to comply with what is threatened so as not to show weakness. However, the action framed in a strategy according to our interests (negotiated or mediated), will place us in the best way of solution.

6. And do not let the conflict grow: talk and listen.

And if “threatening” with legal actions adds blockage to an already difficult situation, talking (and “talking” is usually always better than “writing”) clears the way even more. And together with “talking” nothing better than “listening” and to do it actively. It is shown that in most conversations, discussions or even negotiations, we act more aware of what we want to say, how to counterargument or convince, instead of really understand what the other party proposes or of trying to look for common spaces.

Conflicts are not always definitive (ending the commercial relationship), and very often they are merely circumstantial or partial (unpaid bills, undelivered products, erroneous executions, lack of accountability). In these states, it is much easier to establish new bases or conditions, to find out where the discrepancies are and to solve still minor conflicts, or preventing them from becoming more complex. The help of a loyal advisor who understands the interests to safeguard and collaborates in the determination of the steps to take, is, again, essential. I would dare to say that, on principle, you have to distrust who advises you to go directly to the litigation or confrontation.

The Provincial Court of Las Palmas, in a judgment of October 20, 2017, has ruled on a matter in which we defended a securities company acting as an online broker in front of one of its clients that, operating with derivative financial products, he had left a considerable unpaid debt.

The most interesting part of this resolution is that it condemns the client to pay the contractual interest agreed upon at 18% per annum, rejecting his claim that the clause be declared null and void in accordance with the Consumer and Users Law.

Despite the fact that multiple judgments have considered as consumers those citizens who acquire shares linked to the evolution of the markets, the Court has considered in this case that the client of this type of complex financial products that acts daily in the markets does not fit into the definition of consumer of the Law.

In addition, the Court also understands that these contracts with derivatives are far from being similar to the consumer loan contracts which are the basis of the majority of judgments to declare as abusive this type of clauses, even if they contain a clause on high interest rates to discourage the client from leaving uncovered amounts.

The Provincial Court of Pontevedra (judgement of May 22 2017; rec 213/2016) analysed several contracts between Dismaca, SA (agent) and Repsol Butano, SA (principal). Although the agent alleged that it was a mixed contract and not an agency one, the Tribunal concluded that there was an agency contract independent of others that might exist between the parties.

The discussion was due to the expiration of the one-year limitation period to claim compensation for clients established by the Agency Law. The Agent waived this period and asked the application of the general one set in Article 1964 of the Civil Code due to the alleged mixed and atypical nature of the contract.

The Court rejected this claim because of its contradiction with the approach of the claim that spoke of agency contract, and by the exercise of the action of goodwill (clientele) compensation based on the regime of the Agency Law.

The independence of the contracts is, in the Court’s view, contradictory with a hypothetical single mixed contract. Nor does it accept the qualification as an atypical contract, given the express reference to a special Law that regulates the agency contract. The Court insists that it was the agent who claimed based on an agency contract, only with subsequent rectifications to avoid the application of the expiration term.

The recent Supreme Court judgment 137/2017 of 1 March (rec 2672/2014) considers that the criteria to calculate the amount of goodwill (clientele) compensation in a distribution contract cannot follow the criterion of the “gross margin” obtained by the distributor, but the “net margin”. In order to reach this conclusion, the Court follows its judgment 356/2016 of 30 May (rec 148/2014), which refers to the Judgement 39/2010 referring to 697/2007 of 22 June (rec. 2943/2000).

At present it seemed that the Supreme Court was inclined to calculate the clientele compensation in distribution agreements on “gross margin” as an analogy with Article 28 of Agency Act. Does this imply a change in case law?

According to well-established jurisprudence [see Supreme Court Judgment 1392/2008 of January 15, rec. 4344/2000)], a distributor may be entitled to goodwill (clientele) compensation if the inspirational idea of article 28 of the Agency Contract Law was applied by analogy. However, since there is no “remuneration” in distribution contracts such as that received by the agent (commissions or fixed amounts), but “commercial margins“, the question was whether the “gross margin” (difference between the purchase and resale price) or the “net margin” (the same difference but deducing other expenses and taxes) should be considered as the basis for this compensation. The conclusion accepted by the Supreme Court until now seemed that it was necessary to calculate the compensation on the “gross margin” being a magnitude more comparable to the “remuneration” of the agent: it was not possible to deduce other expenses and taxes, just as for the agent those same expenses and taxes were not deduced.

However, the new Judgment seems to accept the contrary and to support the calculation of clientele compensation in distribution agreements on net margins. Nevertheless, in my opinion, the reading done by the Supreme is not correct.

In the 2017 ruling, the difference between gross/net margin is mentioned referring to judgment 356/2016 of May 30. In that judgment of 2016, it was said that although in a previous Judgement 39/2010 was not concluded on whether the calculation had to be made on gross or net amounts, in a previous one (Judgment 296/2007) it was, nevertheless, accepted that the net profit obtained by the distributor (by deducing expenses and taxes) was similar to the remuneration of the agent, and not the gross margin which is the mere difference between prices of purchase and resale.

This said, in my opinion, in its Judgment of 2016, the Supreme Court did not use a correct reference when leaning on the one of 2007 for something that the latter did not say. In fact, in 2007, the Supreme Court did not quantify the goodwill (clientele) compensation, but the damages compensation. More specifically, the Court said in 2007 that “goodwill (clientele) compensation might be clearly requested in the complaint, without any confusion or ambiguity“, and after that, the Court concluded that it “should resolve according to the terms in which the debate … was raised in the initial claim. And since this one was interested in compensation for damages mainly based on the length of time the relationship … the most appropriate solution according to the case law of this Court … is to set as compensation for damages on an amount equivalent to the net profits that the plaintiff obtained by the distribution of the products of the defendant during the year immediately preceding the extinction of the contract“. Therefore, the Court did not analyse in 2007 goodwill (clientele) compensation, but damages compensation.

Then the conclusion followed in 2007 to calculate the damages indemnification on net margins, was then followed in 2016 but to calculate the clientele compensation and reiterated now in the 2017 Judgement with the same conclusions.

Regardless of all this, and also in my opinion, it does not make much sense that if the analogy with the Agency Contract is applied, any amount (such as taxes or other expenses) should be deducted from the gross margins to reach a net margin. If the intention is to analogously apply the “remuneration perceived by the agent”, it seems clear that the agent has also expenses and also pays taxes; nothing in Directive 86/653/EEC nor in the Spanish Agency Act says that it must be deducted anything from the “received” amount in order to calculate the goodwill (clientele) compensation. If the amounts the agent perceives are the commissions (from which he will pay his taxes, his rent expenses, employees, etc. obtaining his “net profit”), the same criteria should apply in a distribution contract.

In conclusion, and in my opinion, the Judgment of 137/2017 only emphasizes what I consider to be a previous error and adds additional confusion to a question that is already very much discussed: the analogous application of goodwill (clientele) compensation to distribution contracts and its method of calculation.

NOTE: The Supreme Court seems to confirm this judgement by a new one in May 19 2017 signed by the same Judge.

The book contains a detailed questionnaire for 17 different jurisdictions and permits to have a first approach to the subject not only in those countries but also to compare the regulations in each of them.

It intends to solve the main questions on Agency and Distribution agreements. The questions try to discuss about the following: the possibility of establishing a local company to import products (laws governing the formation of entities, how foreign parties are treated); distribution structures with reference to the termination of the agreement, compensations, transfer of rights, confidentiality; non-competition covenants (with reference to resealing prices, for instance), restrictions on territories or customers; other general issues arising in this sort of agreements such as advertising provisions, intellectual property clauses, consumer protections issues, warranties, employment connected conflicts; and also governing and choice of forum and dispute resolution remedies.

You can have a free pdf copy of the Spanish chapter by clicking Distribution and Agency 2016.

Reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through: Distribution & Agency 2016, (published in March 2016; contributing editor: Andre R Jaglom, Tannenbaum Helpern Syracuse & Hirschtritt LLP). For further information please visit www.gettingthedealthrough.com.

Conflicts when terminating agency and distribution contracts arise mainly in claiming compensation for clientele. Agency Act provides that when the contract expires, the agent is entitled to compensation, which, by analogy (with caveats and nuances), can be extended to distributors. For this compensation it is necessary that the agent has brought new customers or significantly increased operations with the pre-existing, that his previous activity can continue producing substantial benefits to the principal and that is equitable. Such compensation may not exceed one year’s remunerations (annual average received during the last five years or the duration of the contract if lower).

Because of these inaccuracies (new clients, significant increase, can bring substantial benefits, equitable) claims are usually supported by expert reports. There is, however, a tendency to claim directly the maximum standard (one year of remuneration) without going into further analysis. But doing so there is the risk that a judge rejects the request as unfounded. We herein give some hints to help to get the maximum amount of compensation. According to our experience, it is convenient that the agent and the expert take into account the following:

1. Check what has been the contribution of the agent: if there were customers before the contract and what volume of sales existed (it is a previous condition to have increased the number of customers or transactions with them).
2. Analyse the importance of such clients in order to ensure future benefits for the Principal: their recurrence, fidelity (to the Principal and not to the agent), the migration rate (how many remain with the Principal at the end of the contract). It will be difficult to recognise a “clientele” with sporadic, occasional, non-recurring clients or that still remain in the area of ​​agent.
3. How the agent remains after the termination: does the contract prevent the agent to compete with the Principal? Is this competition difficult because of the kind of market, the products or the type of agent? If the agent continues to serve the same clients but for a different Principal, clientele compensation could be put into question.
4. Is this compensation fair? Examine how the agent has acted in the past: the degree of fulfilment of his obligations, his work in introducing products or new markets, the possible development of such products or services in the future, etc.
5. What commissions does the agent lose in the future? See the exclusivity that he had; the difficulty to sign a new agency contract (because of his age, crisis, etc.) or a new source of revenue, the sales trend in recent years (those considered for compensation), etc.
6. Calculate the maximum that can be received as compensation: the yearly average perceived during the contract period (or 5 years if it lasted more) including all fix amounts such as commissions, bonuses, awards, etc. or gross margins in case of distributors.
7. And finally, if there is an expert report, do include in it all the documents used to reach the conclusions, otherwise a judge could refuse it all.

Note: In order to prepare this post, I have also considered the Commission Report of 23 July 1996 COM (96) 364 and the Judgement of the European Court of Justice of 26 March 2009, Case C-348/07

The law requires that the party seeking in Spain to develop the activity of transferring a franchise must communicate its data to the Register of Franchisors within 3 months from the start of the activity. Failure to comply with this obligation may involve sanctions between 3,001 and 15,025 euros.

However, before deciding to develop a franchise in Spain, franchisors (especially those coming from outside the European Union), will hold several “activities” such as market research, seeking franchisees, pre-contracts, confidentiality agreements, disclosure of pre-contractual information … Then, when does the activity start, ie, what is the starting moment for the three months delay for the Franchisor to register?

According to the norm, “franchise commercial activity ” is defined as the activity under a contract that gives a company the right to operate a business under a franchise system and under certain conditions.

As I said, in a franchise relationship there is a prior phase consisting of market research, development of business plans adapted to the country, development of templates… most of them even carried outside our country and not necessarily concluding with the “activity ” itself (franchisor may conclude, for example, that the activity is not viable or that is not the proper moment, or any other reason implying that the business is not concluded).

A second moment  may involve the active searching for potential franchisees to Spain and the beginning of a commercial relationship: promoting the franchise, participation in fairs, interviews, etc. In these cases franchisees may be interested in receiving more information, the signature of pre-contracts, letters of intent, confidentiality agreements will be signed, payments will be made, etc. all with regard to the development of the Franchise in Spain, but without having yet signed the franchise agreement. However, to the extent that the Register of Franchisors has an informative purpose of maintaining an updated franchisors census and that the potential franchisee may wish to compare all the data received with those declared to the Register, it seems reasonable to argue that the registration obligation arises from the moment the first potential franchisee signs any agreement, confidentiality agreement, compromise, letter of intent, etc. that can originate in the future the franchise agreement in Spain.

Negotiating and drafting international Agency or Distribution agreements not always an easy question because it regards what is governed during the agreement but also the important consequences (in term of legal requirements and economic consequences) of the termination.

This paper is a mere summary of what has been presented and discussed in Munich in September 10 2016 by Ignacio Alonso at the occasion of the Workshop-Seminar «Drafting Effective International Contracts: International Sales, Agency and Distributorship Contracts» of the UIA joint session of the Contract Law and International Sale of Goods Commissions. The information has been obtained, among other sources, from the International Distribution Institute Reports (www.idiproject.com).

It contains some clues on what to take into account when drafting Agency and Distribution contracts regarding the goodwill indemnity and damages compensation after the termination of the agreements.