The legal regime relating to unilateral termination of exclusive distributorship agreements of indeterminate duration has been recently modified by the adoption of the Belgian Economic Code. This matter is now contained in Title 3 of Book X of the Code (articles X.25. et seq) and reproduces the provisions of the previous law of 27th of July 1961.
Title 3 of Book 10 of the Economic Code, which is sometimes seen as being very protective of the distributor’s interests, is unusual in the way that it exclusively governs the consequences and modalities pertaining to the termination of the contract but does not contain provisions governing the whole of the contractual relationship.
In addition, its scope of application is very limited, since it will apply only in the presence of:
1) a distribution agreement,
2) that is exclusive, quasi-exclusive or imposes important obligations on the distributor, and that is,
3) concluded for an indeterminate period of time.
A distribution agreement is defined as being a contract whereby the distributor buys and resells, in his name and for his own account, the products covered by the contract. It differs notably from an agency agreement in which the agent does not purchase the products and his role is limited, either in receiving orders which he then passes on to the manufacturer, or accepting such orders.
From a legal standpoint, the statute of these two types of contracts is fundamentally distinct, agency contracts being subject to specific legislation.
Another condition for Title 3 of Book X of the Code to apply is that the distribution agreement grants the distributor territorial exclusivity or quasi-exclusivity or imposes on him a series of important obligations (article X.35 of the Economic Code).
The notion of exclusivity does not create any problem and is the one that is find the most in practice since the distributor generally has exclusive rights in respect of a specific territory.
The exclusive nature of the contract can be reflected either, with respect to a specific territory or, with respect to specific products, or even, with respect to a specific type of customer. It can be the case that a distributor has exclusive rights for certain products in a given territory, while the sale of other products is reserved to the manufacturer or another distributor or in some cases, the manufacturer or importer will reserve the right to sell directly to certain specific customers.
Moreover, case-law accepts that exclusivity can be shared in the sense that there can be several exclusive distributors operating on the same territory.
The notion of quasi-exclusivity finds application where the distributor, without having total exclusivity, nevertheless represents a considerable part of the sales in a given territory. The notion is obviously subject to appreciation and the courts have ruled in this respect that 30% of the sales in a given territory was not sufficient for a distributor to be considered as an exclusive distributor.
As regards the notion of important obligations, case-law relates to obligations such as those requiring the distributor to have specific equipment or premises, to constitute a stock, to have qualified employees, to provide guarantees or after-sale services, etc.
However, Title 3 of Book X applies only when the contract has been concluded for an indeterminate duration. Contracts of indeterminate duration and contracts of determined duration must therefore be examined separately:
A contract of determined duration is a contract which either, indicates a precise date on which the contract will end or, stipulates its exact duration. For example, a contract concluded on the 1st of January 2010 for a fixed-period of 5 years will normally end on the 31st of December 2015.
Under the general rules of civil law, a contract expires ipso jure at the end of its term (that is to say, in this example, on the 31st of December 2015), without there being any need to give a termination notice prior to that date.
However, Title 3 contains two derogations to the general rules of civil law. It provides that when a distribution agreement has been concluded for a determinate duration, “the party which intends not to renew the contract beyond its normal contractual expiry date, is obliged to give notice to the other party by registered letter posted no less than three months and no more than six months before the agreed expiry date”.
If such a notice is not given during that period, the contract will be deemed to have been renewed either for the duration foreseen in a provision relating to renewal by tacit agreement if the contract contains such a provision, either for an indeterminate duration, when the contract does not contain such a provision. This also means that, if the contract does not contain any provision relating to renewal by tacit agreement, and that the parties continue their relationship after the normal expiration of the contract, the contract will be deemed to have been renewed for an indeterminate period.
Moreover, Title 3 contains another derogation to the general rules of civil law: if a contract of determined duration has been renewed twice, any subsequent extension will be deemed being of indeterminate duration (article X.28 of the Code).
Except for these two special provisions, the termination or non-renewal of a contract of determined duration is not subject to no other provisions protecting the distributor’s interests.
Thus, this means that, provided that the timeframe for the “non-renewal notice” has been respected, the distributor whose contract has been terminated, will not be able to claim any compensation in lieu of notice. In addition, and above all, he will also not be able to claim any clientele compensation or any damages for the loss resulting from such termination (unless in case of abuse of rights).
In the case of a contract of indeterminate duration Title 3 provides that, other than in cases of serious breach, a contract can only be terminated subject to “reasonable notice” or “fair compensation”.
Once again, two hypotheses must be examined, depending on whether or not the contract is terminated for reasons of serious breach.
a). Notice or compensation
Termination of the contract in such circumstances supposes therefore that “reasonable notice” is given or, failing that, the payment of a “fair compensation”.
Title 3 gives no indication as to how the period of notice should be calculated. However, it stipulates that the period of notice can only be agreed between the parties at the earliest after the termination of the contract. Therefore, any clause whereby the notice period is stipulated in the contract itself is invalid.
Besides, Title 3 stipulates that this notice period must be calculated by taking into account, where applicable, trade usages, and that the judge is empowered to decide in accordance with the principles of equity.
Case-law considers that a reasonable notice period is that which is theoretically necessary for the distributor to find an equivalent source of income or to convert and rebuild its activities. This assessment must normally be made “theoretically”, that is to say, based on an evaluation to be made at the moment the notice was given. Nevertheless, in practice, case-law very often takes into consideration post hoc elements.
To assess this theoretical period, the courts generally take into consideration the following elements:
On the basis of these different criteria, the notice periods determined by case-law vary from three to forty-eight months.
When the contract is terminated without notice (without there being any possible justification on grounds of serious breach) or with insufficient notice, the distributor has the right to claim compensation in lieu of notice.
This compensation is therefore intended to provide the distributor with the same advantages as those that he would have enjoyed if the contract had continued to exist during the notice period which he should normally have been given.
In that case, the compensation is calculated either on the basis of the net profit generated by the activity, plus general minimal costs, that is to say expenses closely linked to the distributorship and which the distributor will continue to bear after termination (such as: rent, fixed costs, etc.) or inversely, on the basis of the gross profit generated by the activity, minus reducible costs, that is to say those which can be immediately reduced.
Most of the time unfortunately, courts will appoint experts to determine the amount of such compensation.
b). Additional compensation
In addition to this compensation in lieu of notice, the distributor may also claim additional compensation, in respect of three distinct items:
1). Clientele compensation
This is obviously the most important item. The distributor is entitled to claim clientele compensation under the condition that he created an added value in terms of clientele, that this added value is important and that the manufacturer will continue to benefit from that customer base after the termination of the contract.
The last condition is the one which causes the most problems since it presumes it can be demonstrated that the customers are more attached to the name of the brand than to the person or the distributor’s company and will therefore prefer to follow the brand name and go to another distributor rather than to stay loyal to the distributor should he sell another brand.
Unfortunately, the Economic Code contains no objective element for calculating this compensation, and merely repeats that it must be calculated in accordance with the principles of equity.
Case-law, in this instance, is particularly confusing. Some judgements assess the amount of the compensation in accordance with the principles of equity but without any specific details. Others take a percentage of sales for the year preceding the termination of the contract, whilst others refer to the average net profit, or to a percentage of the gross annual profit.
2). Compensation for costs
Title 3 also provides that the distributor can claim the reimbursement of costs he has incurred for operating the distributorship and that will benefit the manufacturer after the contract has ended. This mainly relates to advertising expenditures incurred by the distributor for the brand and that will continue to benefit the brand after the termination of the contract.
3). Termination fees
Title 3 also allows the distributor to claim termination fees he has to pay to employees whom he is obliged to lay off because of the termination of the contract.
c). Retrieving of the stock
This question is not resolved by the Economic Code but case-law and legal doctrine generally consider that, if the contract does not address this issue, the manufacturer or importer has an obligation to take back the stock of products still in the possession of the distributor after termination of the contract.
Very often, unfortunately the contract will include a clause stipulating expressly either, that the manufacturer will not take the stock back, or, that he will be free to retrieve it or not (which resumes in a total absence of obligation on his part).
The majority of the case-law and legal doctrine considers that, in such cases, the contract must be respected.
If the contract is terminated because of a serious breach, the distributor is not entitled to claim any compensation or additional clientele compensation, nor is he entitled to require the manufacturer to take back the stock.
Here the notion of serious breach is comparable to that which applies under labour law: a serious breach is one that makes it immediately and definitively impossible for the parties involved to continue a contractual relationship, because of the resulting loss of confidence.
Under the general rules of civil law, the courts normally retain the right to assess what constitutes a serious breach in the sense that the party that terminates a contract on those grounds always runs the risk that the court may consider, a posteriori, that the serious breach was not real or did not justify immediate termination of the contract.
In such a case, the party terminating the contract will have to pay the compensation or additional compensation normally stipulated by the law.
In practice, most contracts therefore classically include a provision stipulating expressly that such and such contractual defaults will automatically be considered as a serious breach. The Belgian “Cour de cassation” has recognised the validity of such clauses.
In practice, contracts also often include “express resolutory conditions”. These clauses do not relate to serious breaches committed by the distributor such as, selling outside the agreed territory, repeated delay in payments or non-accomplishment of sale targets, but they relate to objective events, independent of any idea of fault, which are nevertheless generally sanctioned by the immediate termination of the contract.
The most common “express resolutory conditions” relate to events such as a change in shareholding, bankruptcy or any other situation in which the distributor has difficulties which have the consequence to undermine his solvency.
The “Cour de cassation” has also recognised the validity of such clauses.