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.

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 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 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.