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.
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 is considered to have been tacitly renewed for an indefinite term.
Termination of the Distribution Agreement
Distribution Agreements of a 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 notice period. This notice period is to be considered as a compensation in time for the Distributor to prepare itself for the situation the Distribution Agreement ends. A reasonable notice period takes into account all circumstances of the specific case such as investments made, underlying reason for the termination, results of Principal and Distributor, dependency of Distributor upon product of the Principal, et cetera.
If a notification period has been (contractually) agreed upon, this notification period will have to be taken into account. Nonetheless, the specific circumstances (such as, but not limited, the aforementioned circumstances) can be of influence for the actual notification period that is to be considered reasonable. For example, if a notification period of one month is contractually agreed upon while the Distribution Agreement is in effect for more than ten years, a notification period of one month will be deemed unreasonable if challenged.
In this respect, it should be noted that the unlawful termination of a Distribution Agreement will have no effect and will therefore result in the agreement still being in force. Compensation in case of termination comes into play only if the termination itself is legally valid.
Dutch 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 indemnification claim as main consequence of the Distribution Agreement's termination
If the Principal lawfully terminates the Distribution Agreement, the Distributor can nevertheless claim compensation on the basis of the principles of reasonableness and fairness (please note that this is also possible in case a reasonable notice period is taken into account). Such compensation is open to discussion. For example discussion is possible in case the Distributor made investments in the belief the Distribution Agreement would be continued (or upon explicit request of the Principal), while those investments are not yet recovered at the moment the Distribution Agreement is terminated lawfully. Investments that in principle have to be compensated (if not yet recovered) are: building/rebuilding warehouses/office space, hiring of specialized personnel, advertising materials, linking the stock records, service facilities (as far as specifically related to the supplier business and also customary). General investments of the Distributor do not qualify for compensation.
A ground for compensating can also be found in (strong) dependency of the (business of the) Distributor on the Principal. This could be the case if at least 80% or more of the turnover of the Distributor is the direct result from sales of products from the Principal or if an important part of the clients of the Distributor are tapped by the Principal after termination.
In case law compensation regarding termination of a Distribution Agreement is linked to compensation of lost profits. Little can be said about the compensation amount exactly. Case law shows a much divided point of view, depending on the specific circumstances of the case. The loss related to termination could be eliminated by repurchasing the stock that is still at Distributor's disposal at the time the Distribution Agreement ends. In most cases and especially if the notice period is shortened, the lost gross profit (deducted by any cost savings made by Distributor as a result of not having to perform its Distribution duties anymore) is compensated during a certain period of time (for instance the time the Distributor needs to really adjust to the "new" situation, namely that no longer a Distribution Agreement between the parties is in force). A specific calculation of the loss over such a period occurs as well. However, it is often very difficult for the Distributor to show its actual loss, or at least to substantiate the link between the termination of the agreement and the (actual) loss. Therefore, compensation related to the average lost gross profit (deducting costs savings made) and during a period of time equal to a reasonable notice period is most common. In case law it is common to take into account the average profit over the last five years.
Apart from the foregoing, there is no statutory rule entitling a Distributor to goodwill compensation. The prevailing doctrine in the Netherlands is that goodwill compensation is not due.
Other consequences of the Distribution Agreement's termination
Dutch statutory law does not provide specific post contractual clauses. Parties always have to be aware of EU Competition law in case of a post-contractual non-compete clauses.
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