Distribution law in the Netherlands

Agency Agreements

Dutch law on Agency Agreements is set out in the Dutch Civil Code, which article 7:428 and following, in particular implements the requirements of the EU law on Commercial Agents

Formation of Agency Agreement

Are there any formal requirements on concluding Agency Agreements?

Under Dutch law, an Agency Agreement can be executed both verbally or in writing. There are no special formalities to take into account. Upon request of either party however, the other party has to cooperate in formalising the content of the agreement in writing.

Are there any specific information obligations on concluding Agency Agreements?

There are no specific information obligations on concluding Agency Agreements. However, the Principal does have an information obligation as mentioned under the primary obligations, i.e. to provide the necessary documentation about the goods and services. However, these do not specifically concern the concluding of Agency Agreements.

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

Dutch law differentiates – also in b2b situations – between individually agreed agreements and standard terms and conditions.

Regarding standard terms and conditions, there are strict rules on the validity of contractual clauses. Regarding individually agreed contracts, generally, a vast freedom of contract exists. However, this freedom in the field of Agency Agreements is limited as many statutory rules are mandatory and cannot be deviated from contractually (neither in standard terms and conditions nor in individually agreed contracts). In any case, it is very important to bear the strict rules on standard terms and conditions in mind when drafting Agency Agreements under Dutch law in order to avoid the invalidity of contractual provisions.

Scope of Commercial Agency

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.

A del credere clause is only valid if parties agreed upon such mechanism in writing. The liability of the Commercial Agent will be limited to the agreed commission, unless the del credere clause is related to a specific contract or to contracts which the Commercial Agent has concluded in the name and for the account of the Principal.

Although generally Agency Agreements provide for a post contractual non-compete obligation, which according to the Dutch civil code can be agreed upon in writing for a maximum period of two years provided that the obligation is limited to the territory and to products competing with the products for which the Agency Agreement was executed, such a post contractual non-compete clause may under circumstances infringe competition law rules. In this context, the enforceability of a post contractual non-compete obligation can be called into question.

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:

  • A general obligation to safeguard the interests of the Principal is imposed on the Commercial Agent. Amongst other things, this entails that he must carry out an examination into the solvency of the third party with which he is doing business.
  • The Commercial Agent is only obliged to refrain from activities that are competing to the undertaking of the Principal if this was expressly agreed upon.

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

  • The Principal must reasonably enable the Commercial Agent to perform its work.
  • The Principal must provide the agent with the necessary documentation about the goods and services with regard to which the Commercial Agent performs intermediary services and provide him with all information that is required for the performance of the Agency Agreement.
  • The Principal has the duty to notify the agent immediately if he foresees that contracts with third parties will or may be concluded to a far less degree than the agent was allowed to expect.
  • The Principal must inform the agent within a reasonable period of its acceptance or rejection or of the non-implementation (non-performance) of a contract which has been put forward by the agent.

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.

How is the Commercial Agent paid?

Parties are free to negotiate the method of remuneration.

The Commercial Agent is entitled to commissions for all agreements concluded through its negotiation.

The Commercial Agent will also be entitled to a compensation for its services if it has duly executed its obligations, but the Principal does not follow up on its efforts by accepting the offers made to the Commercial Agent or as a consequence of its negotiating skills or does so to a significantly lesser amount than might be expected.

Term and Termination of Agency Agreement

Term of the Agency Agreement

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 or a combination.

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 no notice period has been agreed, the notice period is four months. An additional month is added for agreements exceeding three years. For contracts exceeding six years, the notice period is six months.

Parties can agree upon a different notice period. The following minima however apply:

  • one month after a duration of a maximum of one year;
  • two months for a duration between one and two years; and
  • three months for the following years.

If longer periods are agreed, these may not be shorter for the Principal than for the Commercial Agent.

Notice is presumed to be given at the end of the month in which the notice was received.

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

Following termination of the agreement the Principal has to pay the Commercial Agent goodwill compensation of up to one year's commission based on the average commission over the last five years. The amount of compensation will be fixed by the Court and may vary from this maximum to nothing at all.

Compensation will only be awarded if the Commercial Agent has developed business and has thereby substantially increased the value of the Principal's business.

There are exhaustive cases where no compensation is due, if:

  • the agreement is terminated under circumstances that make the Commercial Agent liable for damages towards the Principal;
  • the Commercial Agent terminates the agreement itself, unless this termination is justified by circumstances which can be attributed to the Principal or is justified by the age, invalidity or sickness of the Commercial Agent on basis of which he reasonably cannot be expected to continue its activities;
  • the Commercial Agent has transferred, with approval of the Principal, its contractual position under the commercial Agency Agreement to a third party.

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.

Other consequences of the Agency Agreement's termination

The statute of limitation is one year after the agreement has ended for a claim regarding goodwill compensation. Furthermore, a right of action based on unlawful termination (compelling reason) or dissolution of the commercial Agency Agreement also expires one year after the occurrence of the fact that gave rise to the claim.

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Distribution Agreements

The Distribution Agreement has not been specifically arranged in the Dutch Civil Code ("DCC"). Consequently, Distribution Agreements are assessed on the basis of the general rules of the DCC’s law of obligations.

Formation of Distribution Agreement

Are there any formal requirements on concluding Distribution Agreements?

Under Dutch law, a Distribution Agreement can be executed both verbally as in writing. There are no special formalities to take into account. For evidentiary purposes, we recommend setting out the Distribution Agreement in writing.

Are there any specific information obligations on concluding Distribution Agreements?

Statutory law does not provide for any specific information obligations regarding Distribution Agreements.

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

Assessing Distribution Agreements in the Netherlands takes place explicitly on the basis of the principles of reasonableness and fairness. It should be noted that parties can determine the "rules" applicable to their agreement themselves by entering into a written agreement. However, if parties entered into a written agreement the principles of reasonableness and fairness are still applicable. It is possible that provisions agreed to in writing are deemed to be contrary to the principles of reasonableness and fairness.

This issue is primarily expressed in the notice periods with respect to terminating a Distribution Agreement and questions regarding the compensation due in such a case.

For example, if a very short notice period has been included in the agreement, a judge can determine that such a notice period is contrary to the principles of reasonableness and fairness and order (for instance) the denouncing party to pay a certain amount for compensation to the Distributor.

Scope of Distributor's instruction

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

The principle of freedom of contract forms the basis of Dutch commercial law. This means that, in principle, contract parties are only bound by the rules agreed between themselves.

However, there are statutory limits to 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 the individual case.

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.

A post contractual non-compete obligation can be agreed upon in writing, provided that the obligation (1) is indispensable to protect know-how transferred by the supplier to the buyer (2) is limited to the point of sale from which the buyer has operated during the contract period and (3) is limited to a maximum period of one year.

Minimum Sales Quotas can be imposed on the Distributor. A quota may, of course, be high enough to constitute a de facto non-compete if it can be shown that in the Distributor's circumstances it would not buy competing products above the quota level.

The Principal is generally not allowed to influence the Distributor's resale price of the products. The contract can only impose maximum prices or suggest recommended resale prices. Although the parties must be confident that the maximum or recommended price will not operate as a disguised fixed price. This point is important in all cases, but above all where the Principal's or Distributor's market share exceeds 30%.

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

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

  • to distribute the products;
  • to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the products;
  • to diligently safeguard the interests of the Principal in all business respects; and
  • to maintain confidentiality.

As a general principle, 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, etc.); and
  • 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. When setting out the obligations in the Distribution Agreement, the vast amount of case law should be taken into account in order to avoid the risk of setting  out invalid contractual provisions.

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. The parties may, however, following the principle of freedom of contract, agree on additional remunerations such as minimum monthly payments. 

Term and Termination of Distribution Agreement

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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Aukje Haan
Partner
Utrecht