Unlocking distribution contracts

Commercial distribution is a key sector of the Spanish economy and after seeing the big display and interest generated by the two recent food fairs held in Barcelona, it is not difficult to believe. First, it was “La Fira Alimentaria”, and at the beginning of the month the Catalan capital welcomed “Biocultura”, centered on ecological products and responsible consumption.

Despite their importance, distribution contracts have no specific regulation in Spain. They only require consent from both parties in order to be formalized. Although this allows great freedom of choice, the lack of regulation prompts a high volume of disputes.

Total deregulation has led to a situation in which the parties are not equal when negotiating and executing these agreements. Generally, suppliers, being more powerful, force distributors to accept unfair terms (namely, exclusivity; limitation of the independence of distributors; remuneration systems or imposition of minimum sales) with the threat of cancelling the contract if they do not agree.

Regarding the contract duration, in the absence of any specific written or verbal agreement, the duration of the distribution contract will be considered to be permanent. Nevertheless, as the case law suggests, both parties can terminate the contract at any time, without the need to prove a specific cause. There is however, a duty of notice judicially recognized. The notice period is of 1 month for every year of contract, up to a maximum of 6 months. Although, this is not a legal requirement for the termination to be valid, the courts have understood it to be proof of good faith in dealings. The way this duty is enforced is by granting compensation for breach of the duty of notice. The maximum amount of this compensation would be the medium average remuneration perceived during the last five years, as established in the Law of the Agency Contract (applied by the courts by analogy). The Spanish Supreme Court has recognised a duty to compensate for the harm caused by the breach of the notice time even when the contract was permanent and no specific duty of notice had been agreed on by the parties.

What characterises this type of contracts is their collaboration aspect, as they go further than an ordinary bilateral agreement. This is so because the supplier not only benefits directly from the sales to the distributor, but also benefits from the distribution network offered by the latter. This creates a double set of ties between both parties. In fact, once the contract is terminated, the distributor may be entitled to compensation for the clientele generated.

This compensation is not automatic, the distributor must prove a) the existence of a clientele created by his personal effort, and b) that said clientele can continue to produce substantial advantages to the supplier. The calculation of the compensation is guided by art. 28 of the Law of Agency Contracts, taking into account the net benefit of the distributor, not the commercial margin.