Is a notice period necessary?
Distribution Agreements in general
Distribution Agreements of fixed term without the possibility of an early termination end upon the expiry of their term, without prior notice, unless this leads to a result that is conflicting with the principle of reasonableness and fairness.
Distribution Agreements of indefinite term where no notice period was agreed upon, may only be terminated with a reasonable and timely notice period. A reasonable notice period takes into account all circumstances of the specific case such as:
- investments made;
- duration of the cooperation;
- importance of the contract in the general business.
The provisions of Book X, Title 3 of the Belgian Code of Economic Law are applicable to some but not to all kinds of Distribution Agreements, that are executed in Belgium. The three main categories to which the act applies are:
- exclusive Distribution Agreements, i.e. agreements whereby the Distributor is the only seller of the supplier’s products in a defined territory. Shared exclusivity does not bar the courts from finding that there is exclusivity;
- quasi exclusive Distribution Agreements, i.e. agreements where, according to the case law, the Distributor sells 80 % or more of the supplier’s products in the territory;
- Distribution Agreements where important obligations are imposed on the Distributor, such as investments in stores, hiring qualified personnel, following marketing instructions, reach certain quota’s, etc.
Book X, Title 3 of the Belgian Code of Economic Law provides for a relatively long notice period upon termination of these three types of Distribution Agreements if they have an indefinite term. Contracts of fixed term are considered to become contracts of indefinite term after a third renewal.
In the event that an exclusive distribution of indefinite term is terminated by either party other than for reasons of serious breach of contract by the other party, the Distributor is entitled to a reasonable notice period (Article X.36 of the Belgian Code of Economic Law).
What exactly is considered to be a reasonable notice period is not specified in the Belgian Code of Economic Law but is to be determined on a case by case basis by the parties and, in the event of disagreement, by the Courts. Elements that are taken into account by the Courts in determining the reasonable notice period include:
- duration of the Distribution Agreement;
- extent of the territory;
- importance of the distributed products in the Distributor's entire business;
- opportunities on the market;
- awareness of the products;
- turnover and profits generated by the Distributor, etc…
The notice periods awarded by the Belgian Courts range from 3 months to 42 months. Distributorships that have lasted 10 years will on the average require a notice period of 12 to 18 months.
In the event that a party terminates the Distribution Agreement without any notice period or with an insufficient notice period, the terminating party shall have to pay to the other party a compensation which corresponds to the average semi-gross margin that the terminated party would have realised during the reasonable notice period. The semi-gross margin is calculated on the basis of the net profits before taxes, increased with the irreducible overhead costs which the terminated party cannot eliminate upon termination of the Distribution Agreement.
Are there any formalities to be completed?
There are no specific formalities.
Is there any kind of compensation or goodwill indemnity to be paid?
Distribution Agreements in general
Except for agreements falling within the scope of the Belgian Code of Economic Law, there is no statutory right to compensation. Parties are free to provide remedies.
Book X, Title 3 of the Belgian Code of Economic Law
In case of the termination of the agreement by the supplier, except if this termination is based on a material breach of the Distributor, the Distributor will also be entitled to an additional indemnity pursuant to article X.37 of the Belgian Code of Economic Law.
This additional indemnity consists of the three following elements: goodwill, expenses and the severance pay.
a. Goodwill
The goodwill created by the Distributor will give rise to compensation if it will benefit to the supplier after the termination of the agreement.
In order to be entitled to a goodwill indemnity, the Distributor will have to demonstrate that its customers are attached to the brand name of supplier’s products and not to the business of the Distributor as such. As a result, after termination of the Distribution Agreement, the customers will continue to purchase supplier’s products either directly from supplier or from other or new Distributors.
The indemnity is intended to be a consideration for the goodwill created by the Distributor. No such indemnity should be awarded if the Distributor has taken over existing customers and if its sales have not significantly increased.
The goodwill indemnity is determined on the basis of equity, which makes it difficult to assess. It is often expressed as the equivalent of the net profits before taxes (sometimes increased with overhead costs) or the equivalent of one or two years of gross profits.
b. Expenses
The terminated Distributor is entitled to obtain compensation for the expenses incurred through the exploitation of the Distributorship that could benefit to the supplier after the termination of the agreement.
In most cases, it will be impossible for the Distributor to prove that the expenses he has incurred in connection with the exploitation of its Distributorship will benefit to the supplier after the termination of the Distribution Agreement. Therefore, the courts often refuse to grand this part of the additional indemnity.
Even publicity expenses relating to the supplier’s products are usually not taken into account by the Courts when determining the additional indemnity. Up till now only the Distributor’s expenses of important publicity campaigns just before the termination of the Distribution Agreement have been taken into account by some Courts.
c. Severance pay
The severance pay that the Distributor is required to pay to employees who are dismissed as a consequence of the termination of the Distribution Agreement may be recouped from the supplier.
If the Distributor is required to dismiss employees as a direct result of the termination of the Distribution Agreement, the Distributor can request compensation amounting to the severance pay due to its employees. The burden of proof rests upon the Distributor to demonstrate that the severance pay was due as a result of the termination of the Distribution Agreement.
The severance pay for dismissing personnel in Belgium is relatively high, ranging from minimum three months for lower employees to several years for managers.
Is Bankruptcy a reason for termination?
There is no automatic termination in case of Bankruptcy.
A contractual provision allowing terminating in case of bankruptcy is valid. A contractual provision allowing terminating in case of a judicial reorganisation in the framework of Book XX, Title V of the Belgian Code of Economic Law is not valid.
What is the statute of limitations?
A statute of limitation of 10 years applies to all claims regarding the performance of a (distribution) agreement.
May parties choose jurisdiction arbitration?
Parties can choose jurisdiction or opt for arbitration. Belgian Courts can refuse to apply an arbitration clause if during the arbitration, the provisions of Book X, Title 3 of the Belgian Code of Economic Law would not apply to a Distribution Agreement falling within the scope of that law that is executed in Belgium.
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