23 Jan Legal uncertainty in distribution contracts

The agency contract has in Spain a specific regulation in Act 12/1992 of the Agency Contract (which we have already analyzed in our decalogue in a previous post), but not a very similar figure such as the distribution contract, which despite its importance in the commercial sphere does not have its own regulations.

This has led to some precedents having to create solutions to resolve disputes between distributors and companies in case of conflict, and among them is the analogous application of the Agency Contract Law to distribution contracts.

This article explains how the courts have been solving the uncertainties that the lack of regulation implies for the distribution contract and what relationship they have sustained with the Agency Contract Law.

-Compensation for clients.

The remaining customers leaving the distributor is the main advantage that canlead to the company terminating the contract, as in the case of commercial agents, must be arbitrated mechanisms to prevent the enrichment of one of the parties.

However, as there is no provision governing the distribution contract, the question arises as to whether it is possible to apply art.28 of the Agency Contract Law in the matter of compensation for clients or not.

The issue was partially addressed by an agreement of the Magistrates of the First Chamber of the Supreme Court in 2005 that stated that in no case could there be an automatic application of art. 28 LCA, but that if its requirements were met (client contribution or Increase of operations with the pre-existing and that may continue to produce benefits for the employer) could be granted. In addition, another argument maintained by our Provincial Hearings was the granting of such compensation by application of the theory of unjust enrichment, which would be given to the entrepreneur but would recognize compensation when distributing for all his previous activity.

Recently, another judgment of the same Court ratified the path: “it does not implement a mimetic or automatic application of Article 28 LCA, … but, according to the compensatory nature of indemnity for contractual damages, integrate compensation for customers within the framework of loss of profit as an approach for calculating the resulting compensation (1106 of the Civil Code).

-Compensation for failure to give prior notice on termination of contract .

The Law of the Agency Contract also includes in its article 25 rules of notice that must be fulfilled in contracts of indefinite duration, which is 1 month for each year of effectiveness of the contract with a maximum of 6. The need to pre-advise with a minimum notice in advance the rupture of relations is based on the general criteria of good faith and the prohibition of abuse of rights.

It is clear that if a company communicates a week in advance to an agent or distributes the termination of relationships, it is completely unprotected in order to reorganize its activity. In addition, it is probable that you have made investments that are pending amortization to sell the company’s products or other series of expenses Although the Supreme Court has also been ratifying in this respect its position that the relationship can not be redirected via LCA and dismissed the analogical application of aforesaid article 25, it is obvious that recognizes a guiding or interpretative effect, as it points out in a recent Judgment of July 2016.

-Compensation for damages.

Lastly, it has also been widely discussed whether the compensation provided by Article 29 LCA to compensate for the expenses not amortized by the agent, those that he would have done to carry out the business or operations of the principal are applicable to the distributors. In this case, the Courts have not had as many doubts as in the case of compensation for customers in which the analogue application was always more or less deprived.

The same judgment, which is the last case-law in this regard, stipulates that this type of expenses of distributors are only “based on articles 1101 and 1,106 CC.” That is, the general rules of breaches of obligations and contracts.

Therefore, as we see, the lack of express regulation of the distribution contract is supplemented by our jurisprudence by referring to the Law of the Agency Contract, for example, by mechanical means, by granting interpretive value and in other cases by the general rules of law of torts. But this inevitably causes the rules in many aspects to be unclear. Consider, for example, the different kind of calculation the compensations, hence the legal uncertainties that have always affected the sector.

In Navarro Llima Abogados SL we have experience advising both distributors and companies in judicial and extrajudicial proceedings.