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.

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?

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