Once the Agency agreement has terminated by the Principal, the Agent usually decides to claim for some indemnities or compensations. These include damages indemnities and goodwill (clientele) compensation.

In order to claim them it is very important to consider the limitation period in which both can be demanded. We have observed that agents usually take too long to decide whether or not claiming for such compensations, they start negotiations with their principals to find a solution to their conflict, sometimes they are re-negotiating their position for a new agreement, area or conditions; or sometimes they simply consider that there is no rush to proceed.

In similar terms as in the EC Directive on Agency Agreements (art. 17.5), the Spanish Agency Act (art. 31) expressly foresees a limitation period of one year from the termination of the agreement in order to claim both the damages indemnity and the goodwill compensation.

This means that after the expiration of such term, no claim will be admitted by our Courts. And in contracts ruled by Spanish law and submitted to arbitral procedures, the agent also risks finding his claim dismissed after that period. This duration cannot be modified by the parties in their agreement, but they can take some actions to extend it.

This limitation has, therefore, important consequences. Of course, there could be an infinite number of situations and we do not intend to cover all of them, but in case the Agency agreement terminates, the following ideas can be useful:

• The one-year period starts from the day the agreement was terminated. This date should also be considered carefully if there was not a formal termination letter.

• One year, according to the Spanish Civil code, implies that the period terminates the exact day one calendar year after (from date to date, for example, May 1 to May 1 next year) or the following day if that day does not exist (for instance, February 29^th to March 1 next year).

• In general terms, the starting of this one-year period is the termination day and not the date in which the letter was sent or received or when the Principal urges the Agent to fulfil his obligations. The previous notice period (if any) shall be respected if included in the termination notice.

• In case the letter contains an immediate termination, that day will be the starting date, even if the procedure reveals that the Principal should have given a termination notice.

• Generally, this applies to each agency agreement. This means that in case of successive and not connected agreements (for instance, the first one ends and the second one starts 10 months later), the termination period will be considered for each separate agreement. Nevertheless, linked agency agreements (agreements with a specific duration that work one immediately after the previous one) are usually considered as one agreement.

• Some activities of the Agent can interrupt this one-year period, re-starting a new one. For instance (some have been accepted by the case-law, others are expressly mentioned in different pieces of legislation):

1. An extra-judicial claim sent by the Agent or by someone in his behalf claiming for the goodwill indemnity, even if the compensation is incorrectly qualified as employment dismissal instead of commercial agency compensation.
2. Claiming the goodwill compensation as a labour indemnity before the labour courts when it was not clear the sort of relationship between the parties.
3. Starting a conciliation procedure before a First Instance Court
4. Starting a mediation procedure (when done by both parties or by one of them enforcing the mediation clause in the contract) will also interrupt the term during the mediation procedure from the moment in which the request for mediation has been received by the mediator or deposited at the mediation institution.
5. The acceptance by the Principal of the debt or the goodwill compensation when asking the clients list.

• Other actions by the Agent could have different results depending on the circumstances and some have not been accepted as valid to interrupt this limitation period:

1. A claim started by the Agent before a non-competent court, will depend on the circumstances.
2. A criminal prosecution does not interrupt the one-year period
3. The starting of the preliminary procedure (diligencias preliminaries) has neither been accepted to interrupt the one-year period.

Therefore, as a conclusion, in the drafting phase of the agreement it seems to be a good idea to consider a mediation clause. This will grant the parties an additional and useful tool to solve their conflicts and a possible way to obtain extra time in case the courts will be called to intervene.

And when an agency agreement terminates (with or without mediation clause), our recommendation for the Agent is immediately submitting the case to a legal local advisor. When the Agent has, for example, received a promise for a new agreement and he is still discussing on it, or he is still negotiating the termination, it is advisable to be careful and to take the necessary actions at least to interrupt the lapse of the one-year period and not to lose the possibility of a future claim. A simple letter carefully drafted could be very useful for the Agent’s interests.

A final remark for Distribution Agreements. Although for some aspects, particularly the goodwill compensation, Spanish Supreme Court has admitted the analogy with Agency agreements, this is not the case for the limitation period of one year to claim it. The distributor claiming for the goodwill indemnity will not be limited to one year after the contract terminated. In cases like these, it is convenient, however, to have precise advice on the type of contract we are facing, since the border between the agency and the distribution is not always clear.

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.

These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

1. The signature of the contract. Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

2. The proper choice of contract. If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships [if you want to have further information I will participate in a workshop in June 14 2014 in Turin (Italy) at the Annual Conference of the International Distribution Institute: www.idiproject.com]? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

3. Monitoring of legal and business relations. If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

4. Evidences about customers. In distribution contracts evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

5. Evidences on purchases and sales. Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

6. Damages in case of termination of contracts. Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

BONUS EXAMPLES. One of my first claims as a lawyer in distribution agreements was against a big beverages supplier. The agreement with the Spanish Distributor was a mere letter of three paragraphs in which only the second one (no more than five lines) regulated all the relationship for more than 20 years. The drafting was so confusing that our first concern was to verify what sort of agreement we were facing (it seemed a distribution agreement but with some elements of an agency agreement). The claim was for almost 2.5 million euro and it could, probably, have had a higher possibility of extrajudicial solution with a (better) agreement.

I also remember one case where the supplier had accepted for more than 10 years that the distributor never sends the information he was obliged to according to the agreement. Once the supplier decided to change the distributor, then he realised that this (previously accepted) could be used to cancel the agreement for a breaching of the agreement. What do you think?