Distribution law in Bulgaria

The legal framework of the Agency Agreement is set out in the Bulgarian Commercial Act (the “CA”) (Article 32 to Article 48) and implements the provisions of the Commercial Agents Directive (Council Directive No 86/653/EEC).

Under Bulgarian law, a requirement for the validity of an Agency Agreement is to be entered in writing. A simple written form is sufficient. There is one exception to this rule – in case of a tacit renewal of the Agency Agreement no written form is required.

Statutory law does not provide for any specific information obligations on concluding the Agency Agreement.

The Bulgarian Obligations and Contracts Act provides a general obligation of good faith negotiations and conclusion of contracts.

There are no specific pitfalls with respect to concluding Agency Agreement.

However a foreign legal entity should bear in mind the difference between the term “commercial agency” under the Bulgarian Commercial Act and the term '’commercial representation office” under the Bulgarian Investments Promotion Act (the “IPA”). In Bulgarian language, both terms have a linguistic similarity but there is a significant difference in their meaning from legal perspective. The commercial representation office under the IPA can be established by a foreign company and should be registered with the Bulgarian Chamber of Commerce and Industry. The commercial representative office is not a legal entity under the Bulgarian commercial law. In contrast to the Commercial Agent, it cannot conduct commercial activity, including commercial deals.

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. In particular, the parties may decide on instructing the Commercial Agent (1) to conduct all types of activities i.e. entering into commercial deals, conducting legal acts on its own behalf or on behalf of the Principal; (2) the agency may cover either the whole commercial activity of the Principal, or part of it, or only certain types of deals; (3) to act with respect to: (i) all or only certain customers of the Principal; (ii) worldwide or for a certain geographic region.

The CA provides an obligation of the Commercial Agent not to act on behalf Principal’s competitors. Parties may agree that the Commercial Agent shall act solely for the Principal (for a post-contractual non-compete obligation, see below).

Further, the CA provides exclusivity rights of the Commercial Agent to represent the Principal if the scope of the Agency Agreement covers certain geographic region. Otherwise, the parties need to agree on non-exclusivity clause for the region or customers in question.

The EU regulation on vertical restraints (Commission Regulation No 330/2010) only plays a limited role in the field of Agency Agreements (in the field of Distribution Agreements it plays a significant role, see below). However, whether it could apply to the Commercial Agent in the individual case should be assessed at the beginning of a cooperation and this could have significant legal implications. The European Commission Guidelines on Vertical Restraints (2010/C 130/01) is also relevant for the assessment of the Agency Agreement compliance with the competition law.

The Bulgarian CA reflects the provisions of the EC Agency Directive with respect to the primary obligations of the parties to the Agency Agreement.

As a general principle, the Commercial Agent has the following primary obligations based on statutory law:

• to acquire business for the Principal;
• to provide the Principal with the opportunity to enter into contracts with customers or conclude such contracts itself in the name of the Principal;
• to comply with Principal’s instructions;
• to act in Principal's best interest with due care and to provide the Principal with information regarding all contracts and all information available to him regarding Principal’s business;
• confidentiality obligation to protect the trade secrets of the Principal, whereby the Trade Secret Protection Act implementing Directive (EU) 2016/943 of the EP and of the Council of 8 June 2016, will apply; and
• statutory obligation not to represent Principal’s competitors.

The parties may agree that the Commercial Agent undertakes to personally fulfil the obligations under the concluded contract. In such case, the Commercial Agent is entitled to a separate remuneration, agreed in writing.

As a general principle, the Principal has the following primary obligations based on statutory law:

• to support the Commercial Agent with respect to the Principal's business (for example in providing all information and documents needed for the conclusion and execution of the contracts; information on the Commercial Agent’s activity etc.); and
• to pay commission to Commercial Agent (see below).

We strongly recommend detailing in the Agency Agreement the obligations of the Commercial Agent and the Principal. Although statutory rules in this regard exist, more detailed contractual provisions are always recommended.

Generally, the Commercial Agent is entitled to a commission for business transactions between the Principal and customers within the scope of the Commercial Agent's instruction.

The Commercial Agent can claim commission if:

• the business transaction has been concluded as a result of its action;
• the business transaction has been prepared but is not concluded, due to merchant’s fault;
• the business transaction has been concluded with customers that were assigned to the Commercial Agent (applicable also for business transactions concluded without the Commercial Agent's involvement); or
• the business transaction has been concluded within a territory that was assigned to the Commercial Agent (applicable also for transactions concluded without the Commercial Agent's involvement).

The Commercial Agent is entitled to a commission for any of the merchant’s receivables collected by the Commercial Agent.

Upon termination of the Agency Agreement, the Commercial Agent is entitled to a commission for all business transactions being concluded or prepared by him for conclusion.

Where the commission is not agreed, it is assumed that the commission is equal to the usual amount due for this type of activity. If such usual amount cannot be established, fair commission is determined by the court.

The statutory rules on determine the amount of the Commercial Agent's remuneration are not mandatory. We recommend stipulating in the Agency Agreement of the exact way the Commercial Agent's commission will be calculated in order to avoid statutory law leading to a result which the Principal and/or the Commercial Agent did not desire.

Under the Bulgarian law, there are no statutory rules on the term of Agency Agreements. The parties are thus, as a general principle, free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term.

If the parties agree on a fixed term and, after the expiry of the fixed term, parties continue to perform the Agency Agreement, the Agency Agreement is considered to have been tacitly renewed for an indefinite term.

If the Agency Agreement has been entered into for a fixed term, the Agency Agreement may be terminated before the expiration of the Agreement term by any of the parties if the terminating party pays to the other party indemnification for the damages due to the termination. Prior notice is not required.

If the Agency Agreement has been entered into for an indefinite term, it may be terminated by complying with certain minimum notice periods. Bulgarian statutory law implements the Commercial Agents Directive and sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):

• during the first contractual year, a minimum notice period of one month with effect to the end of the month must be complied with;
• during the second contractual year, a minimum notice period of two months with effect to the end of the month must be complied with;
• after the second year, a minimum notice period of three months with effect to the end of the month must be complied with;

The notice periods may not be shortened. The notice periods may be extended by contractual agreement, provided, however that the notice period remains the same for both the Commercial Agent and the Principal.

Bulgarian statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Agency Agreement and in any case terminating the Agency Agreement in writing with confirmation of receipt.

Other legal grounds for termination:

• Due to the personal character of the Agency Agreement, it will be terminated in case of death or putting under custody of the Commercial Agent (for natural person) or in case of termination and liquidation procedure (for legal entity).
• If there is open insolvency proceedings against the Commercial Agent – legal entity;
• If the Commercial Agent loses its commercial capacity by means of the CA.

The main consequence of the Agency's Agreements termination under Bulgarian law is that it triggers the Commercial Agent's entitlement to financial compensation in the form of an indemnification claim.

The Commercial Agent is, upon the Agency Agreement's end, entitled to an indemnification claim, if:

• during the contractual term, the Commercial Agent has acquired business with new customers or significantly in-creased business with existing customers of the Principal and the Principal continues to derive substantial benefits from such business; and
• payment of indemnity is equitable having regard to all the circumstances of the individual case and the existence or absence of restrictive commercial clauses.

The calculation of the indemnification claim according to the above principle is subject to a vast amount of case law that must be taken into account. In any case, however, the amount of the Commercial Agent's indemnity is capped: it may not exceed the Commercial Agent's average annual remuneration over the last preceding five years. The cap may be used as an estimate figure for Principals to assess the financial risk of a termination of the Agency Agreement.

The indemnification claim is precluded, if:

• the indemnification claim was not invoked as against the Principal at the latest one year from the Agency Agreement's termination;
• the agreement has been terminated due to a fault of the Commercial Agent or has been terminated unilaterally by the Commercial Agent under the conditions of the CA, unless the termination is justified due to illness or age;
• the Commercial Agent has transferred its contractual rights and obligations to third party, including with the consent of the Principal.

The rules on the Commercial Agent's indemnification claim are mandatory and may not be contractually excluded. However, there are certain ways to at least influence the risk of an indemnification claim and its quantum which makes it worth including provisions in this regard in the Agency Agreement.

The CA provides that the post-contractual non-compete obligation must be agreed in written form and cannot exceed a period of maximum two years calculated from the end of the Agency Agreement. The post-contractual non-compete obligation may only cover the same territory and type of goods or services subject to the Agency Agreement. It is important to bear in mind that the Commercial Agent is entitled to a respective indemnification for the limitation period. The amount of the indemnification depends on each individual case and is subject to the discretion of the court.

The Commercial Agent is entitled to wave this limitation with a written notification to the Principal sent up to one month after termination of the Agency Agreement in case the termination is due to Principal’s fault.

The indemnification claims, unless specifically provided otherwise, are subject to a general three-year limitation period.

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There are no specific statutory rules on Distributors. The provisions on Commercial Agency in the CA may apply by way of analogy. In addition, Bulgarian Obligations and Contracts Act and CA are also applicable.

The Distributor is a tradesman who has the right to sell the goods produced by the Principal. The Distributor concludes deals both with the Principal and with the customers (end-users). He enters into deals as a purchaser with the Principal and then resales the goods to the customers in its own name and for its own account.

Under Bulgarian law, there are no formal requirements on concluding Distribution Agreements. There are no special formalities to take into account. For evidentiary purposes, the written form is recommended.

Statutory law does not provide for any specific information obligations on concluding the Distribution Agreements.

Bulgarian Obligations and Contracts Act provides a general obligation of good faith negotiations and conclusion of contracts.

There are no specific pitfalls with respect to concluding Distribution Agreements.

If we compare the figure of the Distributor with the figure of the Agent, there are many similarities. However, there are differences of the legal regimes. For example, the Distributor resales goods produced by the Principal to the customers while the Agent is not limited only to this type of specific resale but he can conclude various types of deals related to the business of the Principal (see art. 32, paragraph 1 from the Bulgarian CA). Thereby the Commercial Agent has a broader range of activities with regard to the different types of deals he can conclude.

There are statutory limits to the Principal's and the Distributor's freedom to agree on the scope of the Distribution Agreement (mainly based on EU Competition law).

In particular when it comes to limiting the geographic region in which the Distributor may (or may not) sell the products and the customers to which it may (or may not) sell them, the EU regulation on vertical restraints (Commission Regulation No 330/2010) plays a significant role: such limitations are admissible only under specific requirements which need to be assessed in any individual case. The European Commission Guidelines on Vertical Restraints (2010/C 130/01) are also relevant for such assessment for compliance with the Competition law.

Furthermore, also agreements with respect to the amounts of products the Distributor must source from the Principal is subject to EU Competition law: contractual provisions which require the Distributor to source 80% or more of its demand in products solely from the Principal may only be agreed for five years.

The Principal is not allowed to influence the Distributor's resale price of the products. EU regulation on vertical restraints provides that the exception on the vertical agreements shall not apply for agreements having as their object the restriction of the buyer’s (Distributor’s) ability to determine its sales price without prejudice to the possibility of the supplier (Principal) to impose a maximum sale price or recommend a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties.

Principals should take great care when performing any activities that could be construed as an attempt (even an indirect) to influence the Distributor's freedom to determine the resale price.

As a general principle, it is assumed that the Distributor has the following primary obligations:

• to distribute the products purchased from the Principal;
• to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the products;
• to protect diligently the interest of the Principal;
• to maintain confidentiality, including to preserve the trade secret of the Principal whereby the Bulgarian Trade Secret Protection Act will be also applicable.

On the other side, as a general principle, it is assumed that the Principal has the following primary obligations to the Distributor:

• to deliver the products ordered by Distributor;
• to support the Distributor with respect to the Principal's business (for example in providing information on the product, advertising material, etc.);
• to grant the agreed rebate to the Distributor (see below).

We strongly recommend setting out in the Distribution Agreement the obligations of the Distributor and the Principal. As no specific statutory law on Distributors exists, this is important to avoid disadvantages and to set forth detailed and clear provisions on the specifics of the contractual relation.

How is the Distributor paid?

As a general principle, the Distributor is not entitled to a specific remuneration for its distribution activities. The remuneration of the Distributor consists in the profit it generates in purchasing the Principal's product with a rebate and selling them to its customers at a higher price.

Following the principle of contractual freedom, the parties may agree on different payment scheme, minimum monthly payments etc.

There are no statutory rules on the term of Distribution Agreements. The parties are free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Distribution Agreement, depending on the specific circumstances, the Distribution Agreement may be considered to have been tacitly renewed for an indefinite term.

The terms and conditions on the termination of the Distribution Agreement are subject to the contractual freedom of the parties. As a rule, the contract can be terminated due to default of a party to the agreement following the general provisions on termination of the contracts in the Bulgarian Law.

When setting the term of the Distribution Agreement parties must take into consideration the restrictions imposed by the Competition Law as for example on the duration of non-compete obligations, among others. 

Bulgarian statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Distribution Agreement and in any case terminating the Distribution Agreement in writing with confirmation of receipt.

The termination of the Distribution Agreement in the event of default of one of the parties may trigger an indemnification claim for incurred damages and loss of profit, foreseeable at the time of conclusion of the agreement, that are a direct consequence of the termination of the agreement according to the general provisions of the Bulgarian Contractual law. Provisions concerning the Agency Agreement may also apply by analogy depending on the particular circumstances.

The indemnification claims for damages and loss of profit, unless specifically provided otherwise, are subject to a general three-year limitation period.

Any post-contractual non-compete clauses or non-compete clauses exceeding the maximum duration of five years must be carefully examined on Competition law perspective.

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