1. What is a distributor?
A distributor sells in its own name and for its own account the products it purchases from a manufacturer. The distributor’s remuneration consists of the margin it realises on the resale of the products. The economic risk lies entirely with the distributor.
A distribution agreement is a framework agreement. This agreement forms the durable and structured framework regulating the mutual rights and obligations of the manufacturer and the distributor. It regulates more than just the sequence of purchase-sale transactions. Consequently, it distinguishes the distributor from an ordinary reseller.
The distributor is legally and economically integrated into the manufacturer’s sales structure, so to speak. He enjoys a privileged position. The manufacturer has deliberately selected the distributor as a business partner to distribute its products. The manufacturer grants him the special (pre-)right to distribute his products. This is often accompanied by special obligations such as sales targets, stock and publicity obligations.
2. The Belgian Exclusive Distribution Law
The Belgian Law of 27 July 1961 (now Articles X.35 et seq. of the Code of Economic Law, hereinafter the ‘Exclusive Distribution Law’) offers very broad protection to distributors operating on Belgian territory in the event of termination of their distribution agreement by the manufacturer.
The Exclusive Distribution Law applies to exclusive or quasi-exclusive distribution agreements or distribution agreements with severe contractual obligations for the distributor.
The Exclusive Distribution Law is of mandatory law i.e. this protection cannot be waived with regard to the termination of the distribution agreement.
In the event of unilateral termination of the distribution agreement by the manufacturer – except in case of gross fault of the distributor – the distributor can claim:
- A notice period that can be as long as 36 months;
- Client fees that can go up to 18 months’ gross profit;
- Compensation for staff the distributor has to lay off as a result of the loss of the distribution agreement;
- Compensation for investments made to the extent that they provide benefits to the manufacturer after termination, e.g. advertising expenditure during the last 6 months of the distribution agreement.
3. France: a reasonable notice period
Article L. 442-1, II of the French Code Commercial provides that a reasonable and written notice period that takes into account the duration of the relationship must be observed when terminating a distribution agreement. In the event of a dispute over the length of the notice period, no additional termination fee is due if an 18-month notice period was maintained. In other words, an 18-month notice period is always considered reasonable.
Article L. 442-1, II of the French Code Commercial is a provision of public policy. Thus, it cannot be derogated from by contract.
Accordingly, a distribution agreement should be terminated with reasonable notice regardless of whether the contract stipulates a notice period. A contractual notice period that is disproportionate to the duration of the relationship is declared inapplicable.
The reasonable nature of the notice period is specifically assessed by French case-law on the basis of various elements such as the duration of the relationship, the intensity of trade between the parties, the share of the distribution relationship in the distributor’s overall activity, investments made and reconversion possibilities.
Thus, a six-month contractual notice period may be reasonable even if the terminated distribution relationship is very old (60 years). It was held that this was a sufficiently long notice period to allow the multi-brand distributor to cushion the disadvantage of losing the distribution of that one brand.
On the other hand, terminating a 10-year distribution relationship with just eight days’ notice is abrupt and untimely.
A five-month notice period for a seven-year distribution relationship was considered reasonable.
4. Germany: analogous application of commercial agent legal protection
Section §89 of the German Handelsgesetzbuch states that a commercial agent is entitled to reasonable notice and client compensation in the event of unilateral termination by the principal.
German case-law applies this mandatory legal protection for the commercial agent by analogy in the case of unilateral termination by the manufacturer of a distribution agreement.
- Notice period
In principle, a distribution agreement can be terminated with a reasonable notice period of one month per started contract year and with a maximum notice period of six months. If the distributor has made heavy investments that have not yet been fully amortised and if the distributor is highly economically dependent on the distribution agreement, a longer notice period may apply.
- Client fees
Consequently, to claim client fees, the distributor must demonstrate that it has introduced new clients or significantly expanded the existing client base and that this client base brings significant benefits to the manufacturer after the termination of the distribution agreement.
German case-law also requires the distributor to be contractually obliged to share its client data with the manufacturer. In the event of termination, the manufacturer can then easily prospect this client base (or have it prospected).
The size of the client fees depend on the distributor’s client base and the turnover achieved with these client. The client fees amount to a maximum of 1 year and is usually calculated based on the last 5 contract years prior to termination.
This protection is of mandatory law. It cannot be contractually waived before termination. However, it can be contractually agreed that the distributor’s client base will not be transferred upon termination or that the manufacturer undertakes not to use and will remove the client base upon termination of the distribution relationship. Consequently, the condition to transfer the client base is not met and no client fees are due.
5. The Netherlands: the Franchise Law applicable to distribution agreements in the automotive sector?
Since 1 January 2021, the Franchisewet (‘Franchise Law’) applies in the Netherlands (articles 7:911 to 7:922 of the Dutch Civil Code). The Franchise Law is of mandatory law. Deviating contractual provisions are not enforceable.
Franchise agreements must comply with the following legal obligations, among others:
- the right of consent: the franchisee must always agree to substantial changes to the franchise agreement that the franchisor wishes to implement as a result of a change to the franchise formula and additional required investments. The parties may agree on a threshold value. If the threshold is exceeded, the franchisee’s consent is required.
- the goodwill arrangement: the franchise agreement should determine the manner in which it is determined whether there is goodwill in the franchisee’s business, the extent, if any, and the extent to which the goodwill is or is not attributable to the franchisor. The franchise agreement should also stipulate the manner in which goodwill reasonably attributable to the franchisee will be reimbursed to the franchisee on termination of the franchise agreement, if the franchisor takes over the franchised business of the franchisee in question to continue that business independently or to transfer it to a third party with whom the franchisor enters into a franchise agreement.
- The scope of a post-contractual non-compete clause to the detriment of the franchisee should be limited to (i) what is indispensable to protect the know-how, (ii) competing goods or services, (iii) a period of up to one year after the end of the franchise agreement; and (iv) the territory within which the franchisee operated the franchise formula.
The question arises whether an automotive distribution agreement falls within the definition of a franchise agreement under the Franchise Law.
Dealer associations of the car brands Opel, Citroën, DS and Peugeot are of the opinion that their distribution agreements with Stellantis Nederland should be qualified as franchise agreements within the meaning of the Franchise Law.
Under the Franchise Law, a franchise agreement requires the franchisee to pay a fee to the franchisor for the right to operate the franchise formula.
The dealers argue that they pay higher (purchase) prices for vehicles and parts than other (professional) clients because they get a smaller discount. In other words, they pay a mark-up which, according to the dealers, would qualify as a franchise fee.
In a judgment of 24 May 2023 the Court of Amsterdam ruled that the dealers had not sufficiently proved why these ‘mark-ups’ should be qualified as franchise fees and not, for example, as ‘ordinary’ profits of Stellantis. The court found that the dealers had not made it sufficiently clear why these costs and mark-ups contrast with the right to operate a franchise formula. Consequently, the distribution agreements cannot be qualified as a franchise agreement.
The Court of Amsterdam ruled at first instance. Pending an appeal ruling, the legal qualification of automotive distribution agreements under the Franchise Law remains uncertain.
6. Mandatory Belgian law is not so mandatory in an international context
The fact that the Belgian Exclusive Distribution Law is mandatory law used to lead to forum clauses in a distribution agreement with a Belgian distributor with a choice of foreign law being considered invalid.
In the same reasoning, it was held that arbitration clauses were valid only if the Belgian Exclusive Distribution Law was to be applied or if the foreign regime provided equivalent protection.
This line of thinking was gradually abandoned under the influence of ECJ case law.
Where the manufacturer is a foreign company and through a forum clause designates a foreign court of another EU member state (affiliated to the Brussels Ibis Regulation or the Lugano Convention), as well as foreign law, the mandatory Belgian Exclusive Distribution Law must give way. The reasoning behind this is that Belgian law is subordinate to supranational EU law.
It also used to be sufficient for the forum clause in an international distribution agreement to refer to Belgian law to make the mandatory provisions of the Belgian Exclusive Distribution Law applicable. It is now considered that an explicit reference to the Belgian Exclusive Distribution Law in the forum clause is necessary.
In a recent decision of 7 April 2023, the Court of Cassation ruled that the Belgian Exclusive Distribution Law is not a police law of special mandatory law within the meaning of Article 9.1 of the Rome I Regulation because, in the eyes of the Court of Cassation, the Belgian Exclusive Distribution Law would only protect private interests. This also makes an arbitration clause applying foreign law in a distribution contract with a Belgian distributor to be considered valid.
7. Best practices
- Each country has its own specific rules and customs, so always have a local counsel specialised in distribution law assist you, both in drafting and negotiating distribution agreements and in working out a strategy for terminating distribution agreements.
- In principle, the distributor cannot claim notice and client fees if the distribution agreement is terminated due to his gross misconduct. Case building and picking the right strategy at the start of an termination case are crucial;
- Negotiations on client fees often already start during the current notice period of the distribution agreement. A manufacturer may propose an extension of the notice period during termination in exchange for a waiver of client fees. A longer notice period benefits both manufacturer and distributor, while paying client fees is particularly detrimental to a manufacturer’s cash flow.
