The development of a single European market and the increase of commerce among its member states has led to a significant increase in the distribution within Spain of foreign products and services. Import and distribution within Spain is usually channeled either through a controlled Spanish subsidiary or contractually by means of agency or distribution agreements with independent parties. This article will focus primarily on the agency agreement, while at the same time explaining the differences between the agency agreement and the distribution agreement from the point of view of Spanish law.
American or other non-European parties intending to enter the Spanish market should be aware that the degree of “freedom of contract” here may be more limited than in their countries. In particular, and as regards local distribution, there is a tradition within Europe and more particularly in Spain to provide certain protection by law to local agents who have assisted parties in the penetration of these markets. These “protective” concepts are evidenced in European Directive no. 86/653 which is specifically implemented in Spain by way of the Law of 12/1992 of May 27, 1992 (Hereinafter referred to as the “Agency Law”). The Agency Law is specific to agency agreements (as defined therein). Distribution agreements, on the other hand, are not regulated in Spain by any specific legislation. Rather they are usually interpreted by the Spanish Courts relying on prior judicial decisions and legal doctrine. Nonetheless, both these sources of interpretation are strongly inspired by the Agency Law and it is therefore important to carefully examine its content prior to negotiating either an agency or a distribution agreement.
Parties intending to use agency or distribution agreements within Spain may be subject to a variety of regulations other than the Agency Law, both Spanish and European, including those regarding unfair competition, consumer protection, intellectual property rights and others. Although outside the scope of this article, the application of these additional regulations will depend largely on the particular company, its products and its intended activities. It is therefore recommend that a global analysis of the anticipated activities be carried out before steps are taken to enter the Spanish market.
II. AGENCY AGREEMENTS
According to Article 1 of the Agency Law, an agent is a physical or legal person, who undertakes to represent a third party (referred to as the “principal” herein) for compensation and to promote the principal’s commercial operations on a continuous or stable basis. This promotion may also include the conclusion by
the agent, acting as an independent intermediary, of agreements or commitments on behalf of that third party and for its account. Unless the parties have specifically agreed otherwise in their agency agreement, the agent does not assume the risks related to such commitments and/or agreements.
The critical terms of the above definition as applied by the Spanish courts in identifying an agency agreement and distinguishing it from other legal relationships (such as those of employment, distribution or franchising), include the following:
1. The relationship between the agent and the principal must be “continuous or stable”. In other words the agency relationship must be long standing in nature. The Agency Law is not intended to cover one-off or sporadic representation as, for example, in the case of the intermediation in the sale of a specific property or business. Rather the Agency Law envisages a framework for ongoing transactions with established norms of conduct by both parties.
2. The Agency Law provides that the agent is an “independent intermediary” and therefore must be permitted to carry out his representation with a certain level of autonomy, organizing his professional activity according to his own criteria. The independence of the agent is particularly important for purposes of distinguishing an agency relationship from one of employment. Classification by the courts of an intended agency relationship as one of employment can result in a number of serious unexpected consequences and the level of protection afforded to an employee will be significantly greater.
3. In the agency relationship, the agent does not normally assume any risk related to the transactions promoted or signed in the name of the principal. Any assumption of risk will be considered null and void by the courts unless it is specifically stated otherwise in writing. This is an important aspect that distinguishes the agent from the distributor under Spanish law.
4. Finally the agency agreement is one involving mutual consideration. It involves duties and rights on the part of both parties. Unremunerated actions of one party on behalf of another will not be treated as agency agreements.
C) Duties of the Parties
1. The Agent
Generally, the parties are entitled to establish the particulars of their relationship according to their needs, provided they stay within the bounds of law and public policy. Nonetheless, attention should be paid to the principal duties of the agent as described in the Agency Law so as to avoid the relationship being treated as something else (for example a contract of employment). Notwithstanding
permitted flexibility, the Agency Law does establish minimum duties. Some of these are of a general contractual nature, such as those of good faith. Others, in particular the duty of loyalty, merit further attention. The duty of loyalty is not one of exclusivity. The agent may represent other principals provided it avoids conflicts of interest. Nonetheless, the Agency Law does provide that any representation by the agent of others which involves products or services which are the same or similar or competitive to those of the principal must have the prior approval of the principal. Although not specifically stated in the Agency Law, it is highly recommend that this point be clearly laid out in a written agency agreement from the start so as to avoid misunderstandings.
The Agency Law also lays out a number of other duties of the agent including those of diligence in the promotion of the principal’s interests, maintenance of accounts, the following of instructions from the principal and, finally, an obligation of transparency including the timely advising of developments in the business for which the agent is responsible, including claims by third parties.
2. The Principal
As one might expect in a law intended to provide certain minimum protection to local agents, the list of duties of the principal, as compared to the agent, tend to be more detailed and perhaps more onerous. These obligations include:
a. The principal owes a similar duty of loyalty and good faith to the agent.
b. The principal must provide the agent with all information necessary for the agent to complete his tasks, including relevant documentation and materials such as brochures, price lists, etc.
c. The principal must timely advise the agent of volumes of business which could be significantly below those which could be reasonably expected by the agent. This rather open-ended provision of the Law suggests that the parties should include in their agreement some indication of expected volumes.
d. The Agency Law provides considerable detail as to notice periods for proposed transactions. In particular, it requires the principal to accept or reject within 15 days a transaction proposed to it by the agent. Once the transaction is completed or, in the event it fails to go forward, the principal must so advise the agent “as soon as possible taking into consideration the nature of the transaction.”
e. The principal must compensate the agent pursuant to the terms of their agreement. This rather succinct provision is given much greater elaboration in Section III of the Agency Law and therefore merits more detailed attention below.
D) The Agent’s Compensation
As a general principal, Section III of the Agency Law provides for compensation to the agent whether this be fixed in amount, variable or a combination of the
two. Where the agency agreement does not specify compensation, the Agency Law refers to local custom and reasonableness, terms which can be difficult to determine. Once again, the parties are strongly advised to provide sufficient details in their written agreement.
Although the Agency Law does not specifically treat the question of a lump sum compensation, it does offer considerable detail regarding variable commissions, which it defines as any compensation which varies according to volume or the value of the promoted transactions carried out by the agent. A principal considering the payment of commissions to an agent should review in detail Articles 12 through 19 to make sure that the contractual provisions do not conflict with the provisions of these Articles. Briefly summarized these provisions provide:
i) The agent is entitled to a commission for transactions concluded as a result of his acts or for sales to customers with whom the agent has carried out similar transactions in the past.
ii) In the event the agent is granted a geographical or sectoral exclusivity, the agent is entitled to commissions, regardless of his efforts, for transactions completed in the related area or within the indicated sector.
iii) Where the transaction is completed after the termination of the agreement, the agent is still entitled to his commission where there is a causal nexus between his efforts and the transaction, provided the transaction is concluded within 3 months of the agreement’s termination. Furthermore, the agent is entitled to the commission on orders placed during the contract term but not completed until afterwards.
iv) The commission is due to the agent at the time the transaction is completed or “should have been” completed by the principal or for a transaction partially or totally carried out by the customer. The principal is not responsible for payment of the commission to the extent that he can demonstrate that the transaction was not completed for reasons beyond his control.
v) The Agency Law establishes the agent’s rights to information permitting him to verify the amount of his commissions and specifically states that commissions shall be paid no later than the last day of the month following the calendar quarter in which the right arose.
E) Limitations on Competition
The Agency Law is very brief but clear in its treatment of limitations on the agent’s ability to compete with the principal once the agency agreement has terminated. It prohibits limits on competition which last longer than two years after the agreement’s termination. If the agreement has a duration of less than two years, then the non-compete may only last for a maximum of one year. The Agency Law requires that the non-compete be in a written agreement and that its scope be limited to a geographical area and the particular products or
services for which the agent has been responsible. This, like many other provisions of the Agency Law described in this article, is a mandatory provision applicable to the parties and cannot be avoided by an agreement between them. As will be seen below, the existence of a non-compete may have additional consequences, particularly as regards eventual indemnities.
F) Termination and indemnification
The Agency Law is consistent with general contract principles in its elaboration of causes for termination. They include: mutual agreement, ending of the agreed term and breach of contract. The Agency Law also provides quite specific minimum notice periods which should be reviewed by the parties before entering into an agency agreement.
Regarding indemnities payable to the agent upon termination of the agency agreement, the Agency Law only addresses those to be paid by the principal to the agent and not the contrary. These indemnities include two types: those related to clients and those related to costs incurred by the agent. In the first case, the Agency Law establishes a right of the agent to receive indemnification (compensation) for increasing the number of clients and/or turnover volume with previously existing clients. These indemnities are payable assuming that the increases have benefited the principal and further assuming that there are “equitable” reasons which justify their payment. Although leaving room for interpretation, the Agency Law does cite a number of examples of equitable reasons, which include post-contractual competition limitations placed on the agent (see mention above) or the loss of future commissions. The Agency Law does, however, put limits on these indemnities and they may not exceed one year’s average commissions based on the last five years, or fewer years if the agreement has not lasted that long. Certain exceptions to their payment are also provided for.
As mentioned above, the agent is also entitled to receive certain compensation related to costs incurred. This is the case where there an agency agreement of indefinite term is terminated by the principal and such termination causes the agent to be unable to recover the costs it has incurred based on the instructions of the principal.
The Agency Law is very specific as to applicable jurisdiction in the event of a dispute arising from an agency agreement: the competent courts are those of the domicile of the agent. This provision is intended to ensure that foreign companies intending to use agents in penetrating the Spanish market cannot escape the protective provisions of the Agency Law. Any agreement between a foreign principal and a Spanish agent providing for disputes to be decided by courts outside of Spain will be held to be null and void by the Spanish courts.
III. DISTRIBUTION AGREEMENTS
A) Definition and Characteristics
As mentioned above, the distribution agreement is not regulated by any specific law in Spain. Rather its definition and interpretation by the courts is based primarily on jurisprudence and legal doctrine. The analysis used in defining and interpreting the distribution agreement inevitably draws upon a combination of other more clearly defined agreements and concepts, such as those related to ordinary contracts of sale, service agreements and, perhaps most importantly, the Agency Law. The court decisions have integrated these various elements to define a hybrid concept which can vary according to the specific provisions of each distribution agreement and which is not always easy to distinguish from an agency agreement.
Generally, Spanish court decisions have identified a number of characteristics of the distribution agreement which permit the courts to distinguish it from the agency agreement. The most important of these distinguishing characteristics is that the distributor generally purchases the products of the supplier and resells them in his own name and at his own risk. As a result, the distributor assumes risks which are generally not accepted by the agent, including those of the sale itself and the risk of non- payment. Unlike the agent, the distributor is less likely to work on a commission basis and generally makes his profit based on the mark-up of the product upon resale to the end customer. The distributor tends to play a more permanent and profound role in the distribution strategy of the supplier. Agreements of exclusivity are far more common than is the case of the agent. The distributor also often plays an important role in providing after-sales support and may also be given extensive rights to use related trademarks and other intellectual property within his territory.
B) Comparison to the Agent and Application of the Agency Law
As can be seen, while sharing many of the characteristics of the agent, the distributorship agreement usually brings into play a more complex set of legal relationships. For example, because the distributor purchases the supplier’s products there are elements of sales law that are applicable. Similarly, because the distributor often uses the branding of the supplier, there are aspects of licensing and intellectual property law to consider. After-sales support also raises questions related to service contracts and warranties not normally present in agency agreements. As a result of this more complex relationship, the courts are required to analyze the given contract on a case-by-case basis. The characteristics of each relationship will determine the elements of law to be applied. That being said, given the basic underlying obligation of the distributor to faithfully represent the supplier in the expansion of his sales in a given market, there is almost always a strong analogous connection to the agency relationship and hence the Spanish courts have often resorted to the content of the Agency Law.
Given the limited scope of this article, a full analysis of the various laws applicable to the distribution agreement is not possible here. Nonetheless, it is useful to note those aspects of the Agency law which have been applied by the Spanish courts. Most importantly, the Spanish courts have recognized that when the distributor is domiciled in Spain, the Spanish courts will have jurisdiction and agreements to the contrary usually will not be accepted. This recognition of Spanish jurisdiction inevitably leads to the application of Spanish laws and, where the courts see similarities between an agency, as defined by the Agency Law, and a distribution agreement, they are likely to rely heavily on the Agency Law. In practice, the Spanish courts have applied the Agency Law to distributorship agreements regarding aspects such as termination, notice periods, indemnification, exclusivity and limits on competition. All of this suggests that, even if a foreign party intends to establish a distributorship in Spain and not an agency, he will be well advised to carefully consider the Agency Law as it may be applied by the Spanish courts in the event of a dispute.