A distribution agreement is an important legal instrument in the cross-border sale and distribution of all sorts of products (and related services). This article gives an overview of some of the legal issues relating to distribution agreements under Dutch law. The subjects discussed are especially useful to take into account when doing business with suppliers/manufacturers and distributors within the jurisdiction of the Netherlands.
APPLICABILITY OF DUTCH LAW TO DISTRIBUTION AGREEMENTS
Dutch law will be applicable either when the parties concerned have opted for Dutch law (and this choice is considered legally valid by the competent court) or – in the absence of such explicit choice – when such competent court has reached the conclusion that, on the basis of the procedural laws of its own country, Dutch law governs the agreement concerned, or because of other rules of the procedural laws refer to Dutch law, for instance the applicable law is the law of the country where the defendant has (habitual) residence.
EU law causes an alignment of the legislation in member states. A regulation is even directly applicable in the member states. The primacy of EU law over national law was established on 15 July 1964 in the well-known Costa v ENEL [1964] case.
Therefore, the regulation (EC) No 593/2008 of the European Parliament and the council of 17 June 2008 on the law applicable to contractual obligations (Rome I) is of most importance in the EU and replaces the former convention on the law applicable to contractual obligations of 1980. Rome I took effect on 24 July 2008 and applies EU-wide, with the exception of Denmark (the former convention of 1980 is still applicable there). Rome I applies to all agreements concluded after 17 December 2009 and views the freedom of parties to choose the applicable law as being of prime importance. In principle, this choice also sets aside mandatory law. Only in the absence of such a choice, according to Article 4(1)(f) of Rome I, is the agreement concerned governed by the law of the country where the distributor has habitual residence.
CONCEPT AND ELEMENTS OF A DISTRIBUTION AGREEMENT
If applicable, it is important to realise that Dutch law does not contain specific legislation concerning distribution contracts. However, mandatory competition laws should always be taken into account. For the rest, distribution agreements are governed by the general provisions concerning agreements of the Dutch Civil Code (DCC).
Distribution can also take place through commercial agents. In Dutch law, a commercial agency agreement needs to be distinguished from a distribution contract. A distributor (as opposed to an agent or intermediary) is an independent dealer that buys products and acts in its own name, own account and own risk in order to resell and distribute them. Commercial agency agreements are specifically regulated under Dutch law and have their own legal definition in Article 428(1) of Book 7 of the DCC. Such a contract is defined as an agreement in which one of the parties (the principal) instructs the other party (the agent) who, on payment of a commission, must provide intermediary services involving arranging contracts to be concluded by the principal with third persons. Where appropriate, such contracts must be concluded in the name and for account of the principal, but without being its subordinate.
The basis of the DCC is the principle of freedom of contract: suppliers and distributors are only bound by the rules they agreed to between themselves. To qualify an agreement as a distribution agreement, it must have the following essential elements:
- an agreement between supplier and distributor;
- the purpose of selling and distributing certain products;
- supplier has an obligation to sell the products to the distributor;
- distributor has the obligation to carry out the reselling and distribution; and
- distributor will act in its own name, for its own account and for its own risk.
Distribution agreements mostly contain clauses with respect to the following subjects:
- the territory of the distribution;
- exclusive or non-exclusive distribution;
- the minimum performance requirements that the distributor must achieve (minimum sales);
- products that are covered;
- non-conformity; complaints;
- price and payment (terms);
- shipping terms (risk of loss and insurance); applicability of an Incoterm; and
- term and termination.
A distribution agreement should, in most cases, be categorised under the (innominate) continuing performance agreement, because of the intended continuing co-operation between the supplier and the distributor. Case law relating to continuing performance agreements is therefore an important source to understand how to apply the general rules of (contract) law in relation to distribution contracts.
TERMINATION OF A DISTRIBUTION AGREEMENT
In most cases, a distribution agreement contains a clause that provides how and when the distribution agreement can be terminated by (one of) the parties. In the case of a serious failure in the performance of the distribution agreement by one of the parties, the other party may have the right to terminate immediately. The default must be serious enough to justify this immediate termination. Most distribution agreements also contain provisions that deal with, for instance, termination in case of bankruptcy or change in control of the other party.
It is important to understand that Dutch law distinguishes between agreements concluded for an indefinite period of time and for a fixed (limited) period of time. The case law is clear about termination of agreements for a definite period: if the agreement does not include a provision allowing for premature termination, such a termination is not allowed, unless there are unforeseen circumstances that justify such termination (see Mondia v Calanda [1988]).
If a distribution agreement is concluded for an indefinite period and does not provide for termination, the contract can be terminated in principle, as the Supreme Court of the Netherlands ruled on 28 October 2011 (Gemeente De Ronde Venen v SNU en Stedin [2011]). The Supreme Court ruled that the principles in Dutch law of reasonableness and fairness may also mean in a specific case that such a termination is only possible if there is:
- a weighty reason; and/or
- a reasonable notice period; and/or
- additional compensation.
The necessity of a weighty reason could, for example, be valid if the other party is particularly dependent on the agreement for its business operations.
Other relevant questions that pop up in this context are: when is a reasonable notice period required and what constitutes a reasonable notice period? The answers depend on the circumstances of the case and, in particular, the interests of the parties involved. The relevant circumstances are not limited to a certain category of facts, although it is possible to sum up the following factors that a court will consider anyway (but without limitation):
- the duration of the agreement;
- whether or not the distributor has had a chance to earn back long-term and other investments;
- whether or not the distributor will have to dismiss employees;
- the extent to which the distributor’s business depends on the products purchased from the supplier in question;
- the possibility for the distributor to continue its business by finding (a) new supplier(s) that will sell and deliver competing products to the distributor;
- the reason for the termination;
- the history of the case, such as complaints, promises to improve, or justified reliance on continuation of the agreement;
- the nature of the agreement; and
- the results achieved.
Finally, it is possible that, based on the principles of reasonableness and fairness, additional compensation is necessary, although compensation is already implied in granting a proper notice period. The Supreme Court of the Netherlands ruled on 21 June 1991 (Mattel v Borka [1991]) that, dependent on the circumstances of the case, compensation for specific investments (made by the distributor for the purpose of the continuation of the agreement) is awarded.
DISTRIBUTION AGREEMENT AND COMPETITION RULES
The rules on competition are mandatory rules and therefore prevail over the principle of contractual freedom of suppliers and distributors. The case law of the European Court of Justice (ECJ) and the Supreme Court of the Netherlands with regard to distribution agreements and competition rules is growing.
For example, on 13 October 2011, the ECJ stated in Pierre Fabre Dermo-Cosmétique [2011] that the block exemption for vertical (distribution) agreements is not applicable to clauses in a selective distribution agreement which, in fact, ban internet sales. The products concerned (cosmetic and personal care products) could only be sold in a physical space and in the presence of a qualified pharmacist. The ECJ considered that the nature of such a practice is equivalent to a ban on active and passive sales, which is considered as a restriction that removes the benefit of the block exemption. These clauses constitute an infringement of competition law. The only possible exemption is an individual exemption, but the ECJ ruled that it is for the Paris Court of Appeals to examine whether the conditions for this are met.
Recently, the Supreme Court of the Netherlands ruled (Batavus v Vriend’s Tweewielercentrum [2011]) that the termination by Batavus (a producer of bicycles) of the distribution agreement with their dealer Vriend’s Tweewielercentrum was null and void, because of conflict with the competition rule of Article 6 of the Dutch Competition Act. Article 6 covers the prohibition of cartels (which is based upon Article 101 of the Treaty on the Functioning of the European Union). The reason for the termination was the online sale of the bicycles of Batavus at a low price. Batavus decided to terminate due to the great pressure from another dealer Euretco Tweewielers (which represented 10% of the sales of Batavus). The Supreme Court has qualified the behavior of Batavus and Euretco as concerted practices (with the object to impede competition) and, as a consequence, ruled that the termination was null and void. The Supreme Court considered the termination of Batavus as the tail of the concerted practices. Therefore, termination of a distribution agreement, when forced by other distributors, could be in conflict with the competition rules. Also the refusal to admit a distributor to a selective distribution system, when all the conditions of admission are met, could be in conflict with such rules.
By Lisette Bieleveld, partner and Charlotte Pasteuning, lawyer, Boekel De Nerée.