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.

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

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.

Quite often the purchase/resell commercial relationships between a manufacturer and its retailors is carried out without signing a contract, but with subsequent orders: the manufacturer receives it, then he sends the products, the retailor pays and then he resells to the final customer.

In Spain, as it is known, there is not a “distribution contracts Act”, but courts have accepted a certain analogy with the agency agreement. In a certain way, courts say that agency and distribution are not the same sort of agreements, though some consequences of the agency can apply by analogy to the distribution. This is, for example, goodwill compensation (clientele) in case of contract termination.

Therefore, it is quite usual that when a company continuously buys products from a manufacturer to resell them, its intention is to consider this a “distribution contract”. And why? Mainly because of the goodwill compensation (clientele): this compensation does not apply to the supply contracts, but it is possible in a distribution agreement precisely because of that analogy. And if the manufacturer-retailor relationship has lasted several years, the amount of this compensation can be of some importance (until the annual average of gross margins over the past five years).

But beware, because not all the continuous supply contracts can be considered to be a “distribution contract”. You should ask for advice in each particular case. In Spain, a distribution contract requires something more than a series of purchase and resale of products. The following list will help you to verify whether a particular commercial relationship is closer to a continuous supply agreement or to a distribution one with the possibility, in this case, of claiming the mentioned goodwill compensation:

1. In a supply agreement products are purchased for resale. Its purpose is the resale with a margin without any further conditions.

2. These agreements are usually a succession of orders, with delivery conditions (billing and payment) normally agreed.

3. The distribution agreement, however, involves a “more intense” in the business relationship that does not exist in the mere succession of sales transactions.

4. The distribution agreement involves the mutual cooperation between manufacturer and distributor for distributing a product and is intended to be stable over the time.

5. The distribution agreement gives greater trade integration of the reseller in the distribution network of the manufacturer, and the manufacturer influences more the commercial management of the distributor than with a mere reseller.

6. In the distribution contracts there are usually additional conditions relating to the purchase and resale agreements not limited to the pricing and payment conditions. These may be, amongst others, covenants on minimum periodic purchases, volume discounts, resale areas, exclusivity, prohibition for the sale of competing products, support obligations to end customers, repurchase of non-resold goods.

7. The distribution contracts can also provide other agreements relating to the operation of the business relationship: investments by the distributor, how to place orders, goods transportation, storage and maintenance of stocks, covenants not to compete, compensation for non-compliance, payments and guarantees to ensure compliance, etc .;

8. Finally, distribution contracts usually include agreements for the use of the manufacturer’s trademark (license) with the obligation for the on manufacturer to advertise or to provide special labelling or packaging, etc. and a certain uniformity for distributors (obligations related to the affixing of the trademark, harmonized image, etc.).

In conclusion: if you want to end a relationship of this kind whose nature is unclear, you should analyse the above list to, at least, have an initial idea of ​​what can be claimed or not. In any case, unfortunately this is not an automatic list and it is wise to ask for specific and expert advice before taking any decision.

Note. In preparing this post I have followed some judgments of Spanish courts which may be useful to consult if you want additional information: AP Salamanca 330/2001 of 29 June; TS (Civil Chamber, Section 1) 70/2004 of 5 February; TS 332/2009 of May 18; AP Madrid (Section 11th) 736/2010 of 30 September; AP 553/2010 of 5 October Barcelona; AP Zamora (Section 1) 100/2015 of June 8.

In this procedure, the principal argued that the agent had appointed two sub-agents without his express authorisation and, therefore, he had breached his legal obligations. The agent, on his side, considered that these two persons were not sub-agents but employees. The High Provincial Court of Burgos in a Judgment of June 13, 2014 has specified some elements to take into account in order to distinguish “sub-agents” from “employees”.

According to the Court, the principal knew and accepted that the agent was helped by two persons but nothing in the procedure proved that these persons had an independent organization from the agent’s and evidences showed, instead, that they were part of the agent’s commercial organization: some mails included these persons as members of the agent’s commercial department and according to some witnesses they acted as employees of the agent.

The Court has stated, therefore, that in order to verify if a person is acting as a sub-agent instead of as a employee, it should be verified if this person has an independent organization or if this person is acting as a part of the agent’s commercial structure.

The facts

Mr “A” 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 for a 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 Decision) 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, 18th) 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