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Distribution agreements are commonly used in international B2B trade and serve to optimise the supplier’s sales. It is not uncommon that the supplier lacks essential infrastructure in the market the distributor is active in, so that co-operation through a distribution agreement provides a win-win situation for both.
Distribution agreements arise from negotiations and aim to set out the relationship between the supplier of the products and/or services and the distributor who (re)sells the products to third parties. The distributor buys the products and/or services from the supplier on its own account and risk and then (re)sells these products and/or services into the relevant market. This means that there are two separate contracts, one between the supplier and the distributor and one between the distributor and the purchaser. The ownership of the products and/or services transfers from the supplier to the distributor like in a normal sale and purchase relationship, whereby the supplier and the distributor additionally may agree upon certain commercial terms such as pricing, market, exclusivity and marketing. The ownership of the products and/or services also transfers from the distributor to the purchaser in accordance with the agreed terms.
Definition distribution agreement
A distribution agreement is not specifically regulated in the Dutch Civil Code (DCC), like certain specific agreements such as agency agreements, franchise agreements and employment agreements. The lack of specific national legislation means that nearly every aspect of a distribution contract can be negotiated between a supplier and a distributor. Distribution agreements are generally considered to be undefined long-term agreements, and the rules regarding generic agreements apply. This flexibility is defined and worked out in case law and this plays a substantial part in regulating the distribution agreements in relation to termination of a distribution agreement.
The court of appeal in The Hague defined the distribution agreement as follows:
“The distribution agreement – which is not regulated by law – can be described as a long-term agreement under which one party, the supplier, undertakes to supply certain products or services to its counterparty, the distributor, with a view to reselling those products or services to customers of that distributor at the distributor’s expense and risk and in its name.”
Termination of a distribution agreement
There are few specific rules governing the termination of the a distribution agreement other than what has been developed in case law, due to the fact that there is relative freedom to negotiate a distribution contract between the principal and distributor. Distribution agreements can be for a fixed term or an indefinite term. A distribution agreement that is entered into for a fixed term can generally speaking not be terminated unless there are unforeseen circumstances that are so serious that based on the general principles of reasonableness the agreement can no longer continue.
Distribution agreements with an indefinite term, which do not contain a termination provision, can in principle be terminated (Ronde Venen/Stedin). However, based on the principle of reasonableness and fairness together with the nature and content of the agreement, there must be an important reason for this. Furthermore, it may be that based on the same principle as set out above that a certain notice period needs to be adhered to or that the termination of the agreement is contingent on paying damages for the loss. So there are three elements to take into consideration, being an important reason for termination, a notice period and payment of damages upon termination.
Compensation for loss of goodwill?
Compensation for loss of goodwill upon termination of the distribution agreement is generally not a legal right of the distributor, unless the distributor has made investments or other costs for example, then the principal may need to compensate the distributor for this in the event that the distribution agreement is terminated by giving a short notice period, thereby not giving the distributor the opportunity to earn back his investments. Upon termination of a distribution agreement, it may result in the supplier having to pay compensation based on reasonableness and fairness, even if the notice period is found unfair (Mattel/Borka). The length of the notice period is determined by the interest that each party has in such notice period, and if a notice period is applied which is not sufficient for the non-terminating party in order to cover the investments made, then compensation in the form of damages is payable. See also Supreme Court 6 February 2009, Court of Appeal ‘s-Hertogenbosch 4 December 2018. So it is fair to state that there is a relation between the duration of a notice period, the investments made during the distribution agreement and whether the notice period is sufficient to cover the costs of these investments. If it is not in the interest of parties to apply a longer notice period or if it is not possible given the circumstances, then the payment of compensation is a good substitute of a longer notice period.
This is slightly different to an agency agreement, where the agent has a legal right to compensation for loss of goodwill in the event that the agent has contributed to the goodwill of the business by increasing its turnover as a result of introducing new customers or expanding the turnover substantially of existing clients.
If you are negotiating a distribution agreement would like to make sure that the relevant rights and obligations during the term and also after termination are upheld, or if you have any further questions or queries regarding distribution agreements, please feel free to contact Madelon van Breemen.