Practical advice on the termination of a distribution contract

The resolution of distribution contracts is often a source of conflict, especially because there is no specific regulation as in the case of the agency contract.

This has led to more uncertainties of the desired and many rules on very important issues: compensation to be claimed by the distributor, time to do so, calculation of the same, etc. Both the distributors and the companies that are in an unfriendly termination of the relationships can be faced with claims that can be very large.

We can highlight the following as more fundamental aspects:

  • In order to claim amounts and possible compensation both parties have more time than the one year foreseen in the agency contract, whose regulation is not applied automatically. In this case, they are 5 years instead of 1, so there would be more time to prepare an adequate procedural strategy.
  • The most important thing, once it is confirmed that we are bound to break contractual relations, for the company is to observe broad notice periods. Although the Agency Contract Law can also serve as a guide, the deadlines must be adjusted to the circumstances of the case. For example, if the relationship is for many years or recent investments have been made by the distributor that are not going to be amortized, it will be necessary to observe not those 6 months that the LCA says, but some more. What will be analyzed is whether the termination was done with loyalty and good faith avoiding leaving the other party in a situation of helplessness.
  • It should also be noted that the agreements that allow the contract to be terminated without just cause and exclude indemnities are valid in the distribution contracts. That is to say that any party can rescind without alleging anything and also support the pacts of exclusion of compensation. This is so because the order does not give the distributor the same protection as the agent, so we must analyze each contract and check that we have not waived possible compensation.
  • Precisely these interpretations tend to make companies intend to establish more rigid conditions in their relations with distributors. For example, there is more freedom to agree on commercial objectives, recovery management, anticipate reorganization of the network and to appoint another distributor in the area, etc.
  • Compensation for damages incurred can be made compatible with compensation fo clients created from a lack of prior notice. It is true that in distributor contracts the weight of the brand –name, reputation- is usually greater and that causes a more restrictive jurisprudence in relation to the compensation of clients, it will also be more frequent for the distributors to make heavy investments in capital, human resources to prepare its activity to the demands of the company. So to prove an economic damage in this sense we would have the right to claim.
  • In order to prove the amounts, the economic reality of the damage suffered or the loss of earnings must be addressed, which will be materialized in expert reports based on accounting, growth forecasts, etc. and that also from Navarro Llima Abogados we can jointly provide legal advice.
  • Although a priori was a discussed option, the defense of the distributor is also opening up due to the imposition and the contractual imbalance that operates with the company. Thus, in situations in which there is an overwhelming difference in negotiating force, economic capacity, abuse of position, and even infringement of the competition rules, a new way is opened for the distributor to defend himself in the moments of termination.

All the above requires both companies and agents to have a specialized team, in the prior negotiation, or in the preliminary phase of communication of the termination and subsequent legal dispute of the situation, since as we see, the conflict it must be seen as a whole to guarantee the best position.

If your case does not hesitate to contact the team of Navarro Llima Abogados S.L.

Héctor González

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