Distribution law in Croatia

Croatian law on Agency Agreements is set out in the Croatian Civil Obligations Act (in particular in Art. 804 to 834 thereof), which implements relevant requirements of the EU law (Commercial Agents Directive).

Are there any formal requirements on concluding Agency Agreements?

The Croatian law requires that the Agency Agreement is made in a written form. As this is a mandatory provision, it is considered that the Agency Agreement, which is not made in a written form, has no legal effect.

Are there any specific information obligations on concluding Agency Agreements?

Croatian law does not prescribe specific information obligations on concluding Agency Agreements.

There is only a general obligation to negotiate an agreement in accordance with the principle of good faith and fair dealing. Otherwise, the party in breach might need to compensate damages to the other (damaged) party (culpa in contrahendo). The example of breach of this obligation could be a situation where one party presents untrue information to or hides relevant information from the other party, and thus misleads that other party about the potentials of concluding the agreement.

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

Freedom of contract is a general rule under Croatian law. However, when it comes to the Agency Agreements, special attention should be paid to the relevant provisions of the Croatian Civil Obligations Act, because many of them are mandatory. For example, even the provisions regulating the obligation of the Commercial Agent to diligently safeguard the interests of the Principal, or the obligation to provide the Principal with relevant information regarding the market, etc., are mandatory. Provisions of the Agency Agreement which would be contrary to the mandatory statutory provisions would be null and void.

Are the parties free to agree on the scope of the Commercial Agency?

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) worldwide or for a certain geographic region, (2) for all or only for certain products of Principal, (3) for all or only certain customers of the Principal.

Croatian statutory law prescribes a non-compete obligation of the Commercial Agent during the contractual term as a rule (for a post-contractual non-compete obligation, see below). I.e. the Commercial Agent may not, without the approval of the Principal, undertake to do the same type of work in the same territory for another Principal. On the other hand, the Commercial Agent is in principle free to engage more Commercial Agents for the same type of work and in the same territory.

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 as this could have significant legal implications.

What are the primary obligations of the Commercial Agent and the Principal?

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

• to negotiate agreements with the customers in the name of the Principal, i.e. to provide the Principal with the opportunity to enter into agreements with customers or even conclude such agreements itself in the name of the Principal, if so agreed with the Principal;
• to diligently safeguard the interests of the Principal, to act in accordance with the principle of good faith and fair dealing, and to exercise the care of a good merchant;
• to provide the Principal with relevant information regarding the market, and to regularly report the Principal about the fulfilment of its contractual obligations, (potential) customers and the agreements concluded in the name and for the account of the Principal;
• to act in accordance with the Principal’s instruction;
• to maintain confidentiality; and
• to return to the Principal all things provided by the Principal for use during the term of the agreement, unless otherwise agreed.

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

• to act in accordance with the principle of good faith and fair dealing, and to exercise the care of a good merchant;
• to support the Commercial Agent with respect to the Principal's business (i.e. to provide to the Commercial Agent samples, drafts, price lists, promotional material, general terms and conditions and other documents);
• to provide the Commercial Agent with all information necessary for the fulfilment of the Commercial Agent’s contractual obligations; especially to notify the Commercial Agent about: (i) (non-)acceptance of the offer or non-fulfilment of the agreement if the Commercial Agent participated in the conclusion thereof, and (ii) the need to decrease the scope of the Commercial Agent’s activities below the level the Commercial Agent could reasonably expect; 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, it is important to avoid a legal situation which the parties did not desire. Also, when setting out the obligations in the Agency Agreement, due attention must be paid to the mandatory statutory provisions, in order to avoid the risk of setting out invalid contractual provisions.

How is the Commercial Agent paid?

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

During the contractual term, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

• the business transaction has been concluded as a result of its action, regardless of whether the Commercial Agent negotiated or concluded the transaction in the name of the Principal, or the transaction was concluded directly between the Principal and a customer found by the Commercial Agent (i.e. joint causality between Commercial Agent's actions and other causes is sufficient);
• the business transaction has been concluded with customers that were assigned to the Commercial Agent (in such case even 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 (in such case, even for transactions concluded without the Commercial Agent's involvement).

For business transactions which are concluded after the contractual term has ended, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

• the business transaction is mainly attributable to the Commercial Agent's efforts during the contractual term and if the business transaction was entered into within a reasonable period after the end of the contractual term; or
• the customer's offer to enter into an agreement with the Principal was received by the Commercial Agent or the Principal prior to the Agency Agreement's end.

The Commercial Agent may also claim additional commission in certain cases (special commissions):

• if the Commercial Agent has collected a Principal’s claim based on the authorisation granted by the Principal;
• if the Commercial Agent has given, in a written form, specific guarantees to the Principal concerning the fulfilment of the obligation under the transaction concluded through its agency (the so-called del credere commission).

The amount of the commission may be defined by the agreement or tariff (otherwise, relevant statutory rules on determining the amount of commission apply). The law also provides for detailed rules on determining the moment the right to commission is acquired by the Commercial Agent, the calculation of the commission and the loss of right to commission. The Principal and the Commercial Agent may derogate from these provisions and it is recommendable to stipulate in the Agency Agreement the exact way the Commercial Agent's commission will be calculated, etc. in order to avoid statutory law leading to a result which the Principal and/or the Commercial Agent did not desire. In such case, due attention should be paid to the statutory rule according to which such provisions of the Agency Agreement may not put the Commercial Agent in a worse position (comparing to the position the Commercial Agent would have under the law if the Agency Agreement would not define the details about the calculation of the commission, etc.).

As far as the costs are concerned, the Commercial Agent is not entitled under the law to reimbursement of its regular operating costs (only special costs made in favour of the Principal or upon the Principal’s instruction may be sought). Of course, the parties may agree otherwise under the Agency Agreement.

It may also be noted that, for the purpose of securing the payment of its due claims under the Agency Agreement, the Commercial Agent has the right to retain the sums collected in the name of the Principal and the things of the Principal, which he received, from the Principal or some other person in connection with the agreement.

Term of the Agency Agreement

Generally, the Agency Agreement is considered to be have been concluded for an indefinite term, unless otherwise agreed. The Agency Agreement concluded for a fixed term shall terminate after expiry of its term. If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Agency Agreement, the Agency Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Agency Agreement

If the Agency Agreement has been entered into for an indefinite term, it may be terminated for convenience (i.e. cancelled) by complying with certain minimum notice periods. Croatian statutory law sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):

• during the first five years of the agreement, a minimum notice period amounts to the one month per each contractual year that has started. I.e. during the first contractual year, a minimum notice period of one month must be complied with, during the second contractual year, a minimum notice period of two months must be complied with, etc.;
• after the fifth contractual year has expired (i.e. from the sixth contractual year onwards), a minimum notice period of sixth months must be complied with.

In the absence of a contractual agreement to the contrary, the notice period starts running with the beginning of a month following the month the notice has been served and it ends with the end of the last month. The notice periods may not be shortened. The notice periods may be extended by contractual agreement, provided, however, the notice period for the Commercial Agent is at least of the same length as the notice period of the Principal. Written notice is required. All these provisions apply to the fixed term agreements that have been tacitly renewed for an indefinite term as well (with the fixed term of the agreement being taken into consideration when calculating the length of the period of notice).

Both the Agency Agreement entered into for an indefinite term and the Agency Agreement entered into for a fixed term may be terminated extraordinarily for good cause. This right may not be contractually excluded or limited. If the notice of termination of an Agency Agreement concluded for an indefinite term has been given without a good cause, it shall be deemed as termination with regular notice period. Unfounded termination entitles the other party to terminate the Agency Agreement concluded for an indefinite term without observing the notice period, and to terminate a fixed term Agency Agreement before expiry of its term.

The indemnification claim as main consequence of the Agency Agreement's termination

The main consequence of the Agency Agreement’s termination under Croatian law is that – unless there are certain precluding circumstances – it triggers the Commercial Agent's entitlement to financial compensation in the form of an indemnification claim (this means that out of the two possible consequences EU law on Commercial Agents allows Member States to adopt – i.e. indemnification claim model or compensation claim model – Croatia opted for the indemnification claim model).

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 increased 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, in particular, the commission lost by the Commercial Agent.

When establishing the indemnity amount, the commission paid to the Commercial Agent for agreements concluded after the contractual term has ended, as well as possible post-contractual non-compete obligation imposed on the Commercial Agent should be taken into account. In any case, the amount of the Commercial Agent's indemnity is capped: it may not exceed the Commercial Agent's average annual remuneration over the preceding five years (or the actual term, if it was less than five years). The cap may be used as an estimate figure for the Principal to assess the financial risk of a termination of the Agency Agreement. Payment of the indemnification claim does not exclude the right of the Commercial Agent to demand damages compensation that exceeds the amount of indemnity.

The indemnification claim is precluded, if:

• the Agency Agreement was terminated by the Principal for good cause which was attributable to the Commercial Agent;
• the Agency Agreement was terminated or cancelled by the Commercial Agent (unless the termination or cancellation is justified by circumstances attributable to the Principal or because the Commercial Agent is prevented to continue the Agency due to its age or an illness);
• a third party succeeds to the Commercial Agent according to the agreement between the Commercial Agent and the Principal; or
• the indemnification claim was not invoked as against the Principal at the latest one year from the Agency Agreement's end. Failure to notify the Principal within one year after the agreement has ended also precludes the Commercial Agent to claim damages compensation.

The rules on the Commercial Agent's indemnification claim are mandatory and may not be contractually excluded or restricted before the agreement ends. 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.

Other consequences of the Agency Agreement's termination

In the absence of a contractual agreement to the contrary, Croatian law does not stipulate a post-contractual non-compete obligation of the Commercial Agent. Croatian law, however, allows an agreement on such post-contractual non-compete obligation of the Commercial Agent for a period of maximum two years calculated from the end of the Agency Agreement. Post-contractual non-compete obligation is valid only if made in a written form and if related to the same territory, the same persons or the same goods as the Agency Agreement. There are certain rules on post-contractual non-compete obligation in case the agreement ends for reasons attributable to the Principal. In such case, non-compete binds the Commercial Agent only if:

• the Principal pays him a special fee after the end of the agreement; and
• the Principal pays him an additional monthly fee during the prohibition or restriction of the pursuit of its business, in the amount which equals the average monthly amount of commission he was entitled to in the past five years (or the actual term, if it was less than five years).

It is important to bear in mind that Commercial Agent who terminates the Agency Agreement because of Principal’s faulty behaviour is entitled to notify the Principal by written means, within one month from the date of termination of the Agency Agreement, that he will not respect the post-contractual non - compete obligation. The Croatian law also stipulates that any post contractual non-compete provision of the Agency Agreement, which is in contravention of the mentioned provisions, is without effect if it puts the Commercial Agent in a worse position than that determined under these paragraphs.

Generally, mutual claims arising from an Agency Agreement, as well as claims for compensation of expenses incurred in connection thereto, are subject to a three-year limitation period. Same limitation period would apply to the claims for compensation of damages incurred due to breach of the respective contractual obligations.

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The Croatian Civil Obligations Act does not contain specific rules on Distribution Agreements. They are considered sui generis agreements to which general provisions of the Croatian Civil Obligations Act apply, while specific provisions regulating other agreements (such as provisions on Agency Agreements or on licence agreements) may apply by way of analogy. In addition, important statutory limits regarding Distribution Agreements are prescribed by the competition law. The overview provided hereunder concerns provisions of the Croatian law applicable to Distribution Agreements in general, and not in specific sectors. 1

Are there any formal requirements on concluding Distribution Agreements?

Generally, no special formalities are prescribed with regard to the Distribution Agreements under Croatian law. It is thus considered that the Distribution Agreement can be entered into both verbally or in writing. Nevertheless, for evidentiary purposes, we recommend setting out the Distribution Agreement in writing.

Are there any specific information obligations on concluding Distribution Agreements?

Under Croatian law there are no specific information obligations regarding Distribution Agreements. However, there is a general obligation to negotiate an agreement in accordance with the principle of good faith and fair dealing. Otherwise, the party in breach might need to compensate damages to the other (damaged) party (culpa in contrahendo). Same as for the Agency Agreements, the example of breach of this obligation could be a situation where one party presents untrue information to or hides relevant information from the other party, and thus misleads that other party about the potentials of concluding the agreement.

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

From the perspective of the Croatian Civil Obligations Act, there are no specific pitfalls that have to be taken into considerations when concluding a Distribution Agreement. However, bearing in mind that certain provisions might apply by way of analogy, due attention should be paid to the specific pitfalls mentioned in regard to the Agency Agreement (see above). Moreover, it must be borne in mind that the freedom of contract is limited by the mandatory provisions of the competition law, which apply to the Distribution Agreements (as explained in more detail below).

Are the parties free to agree on the scope of the Distribution Agreement?

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 Croatian and 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 and Croatian regulations on vertical restraints play a significant role: such limitations are admissible only under specific requirements which need to be assessed in the individual case.

Furthermore, the Principal is generally not allowed to influence the Distributor's resale price of the products. While maximum or recommended prices are generally allowed, fixed or minimum prices are prohibited. Principals should thus take great care when performing any activities which could be construed as an attempt (even an indirect) to influence the Distributor's freedom to determine the resale price.

Special attention should also be paid to the provisions, which affect the freedom of the parties to agree on the amount of products which is sold by the Principal to the Distributor. In principle, it is not allowed to oblige the Distributor to source 80% or more of its demand in products solely from the Principal (or another undertaking designated by the Principal) for a period exceeding five years

For a post-contractual non-compete obligation, please see below.

What are the primary obligations of the Distributor and the Principal?

As no specific statutory law on Distribution Agreements exists, we strongly recommend setting out in the Distribution Agreement the obligations of the Distributor and the Principal to avoid any misunderstanding between parties that could lead to any disadvantages.

Following obligations of the Distributor and the Principal are deduced from domestic and foreign case law and legal commentaries.

It is assumed that the Distributor has the following primary obligations:

• to distribute the products (and usually to use its best efforts to enhance the sale);
• to provide the Principal with relevant information regarding its activities and the market;
• to diligently safeguard the interests of the Principal in all business respects; and
• to maintain confidentiality.

It is assumed that the Principal has the following primary obligations:

• to apply reasonable efforts to deliver all products ordered by Distributor;
• to support the Distributor with respect to the Principal's business (for example in providing brochures); and
• to respect and fulfil the contract provisions on payments to the Distributor (see below).

Bearing in mind that the Distribution Agreements usually contain exclusivity clauses (e.g. in regard to the territory) and clauses regulating the minimum quantity of products to be purchased by the Distributor, primary obligations of the Principal and the Distributor will in most cases include the obligation to respect such clauses specifically agreed on between the parties.

How is the Distributor paid?

The practice has shown that the Distributors are usually not entitled to a specific remuneration for their distribution activities. Usually, the remuneration of the Distributors consists in the profit they generate when purchasing the Principal's product with a rebate and selling them to their customers at a higher price. In accordance with the principle of freedom of contract, the parties to the Distribution Agreement may agree on additional remunerations.

Term of the Distribution Agreement

There are no statutory rules on the term of Distribution 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 or a combination.

However, it is generally considered that stipulations in the Croatian Civil Obligations Act on Agency Agreements and licencing agreements regarding the term and termination thereof, should be applied by way of analogy to the Distribution Agreements. This would mean that generally, the Distribution Agreement may be deemed to have been concluded for an indefinite term, unless otherwise agreed. Also, if the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Distribution Agreement, the Distribution Agreement may be deemed to have been tacitly renewed for an indefinite term.

Termination of the Distribution Agreement

If the Distribution Agreement has been entered into for an indefinite term, it may be terminated for convenience (i.e. cancelled). Most legal commentaries advocate that the statutory minimum notice periods for Commercial Agents (which depend on the actual term of the Agency Agreement in question and range between one month and six months) should be applied by analogy to Distributors. If the parties have not agreed on any notice period, some legal commentaries suggest that a six-month notice period (which applies under the law to licensing agreements in the absence of the contractual agreement to the contrary) should apply by way of analogy, at least when the Distribution Agreement is terminated by the Principal. To avoid any disputes about the applicable notice period, it is advisable to regulate the applicable notice period(s) in the Distribution Agreement, taking into consideration the statutory minimum notice periods for Commercial Agents. Bearing in mind that the Croatian law requires a written notice for the Agency Agreements, and for evidentiary reasons, it is suggested to use a written notice for the termination of the Distribution Agreement as well.

Both the Distribution Agreements concluded for a fixed term and those concluded for an indefinite term may be terminated extraordinarily for good cause. The (non-)existence of good cause is to be established based on circumstances of the case. Breach of Distributor’s duty to meet the minimum quota (i.e. agreed goals) and to diligently safeguard the interests of the Principal is mentioned in most legal commentaries as an example of what might constitute a good cause.

The indemnification claim as main consequence of the Distribution Agreement's termination

As described above, the main consequence of an Agency Agreement's termination under Croatian law is that it may trigger an indemnification claim of the Commercial Agent. There is no statutory law on Distribution Agreements prescribing an indemnification claim; however, following the principle of freedom of a contract, the parties are free to foresee it in Distribution Agreements, while the rules regulating the indemnification claim of Commercial Agent may apply by way of analogy.

Other consequences of the Distribution Agreement's termination

Statutory law does not provide for a post-contractual non-compete clause. The competition law, as a general principle, considers a post-contractual non-compete clause as invalid and only allows for such to be included under certain exceptional circumstances. If a post-contractual non-compete clause has been validly agreed (complying with the competition law), relevant statutory provisions regarding Commercial Agents may apply by way of analogy to Distributors as well.

Generally, mutual claims arising from a Distribution Agreement, as well as claims for compensation of expenses incurred in connection thereto, are subject to a three-year limitation period. Same limitation period would apply to the claims for compensation of damages incurred due to breach of the respective contractual obligations.

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