Parties to distribution contracts regulated by Spanish law may find themselves unwittingly subject to the Law on Agency Contracts of 12/1992 of May 27, 1992 (hereinafter referred to as the “Agency Contract Law”). Spanish law in general may apply where the parties have so stated in their contract or, where no applicable law has been chosen by the parties, the requisite minimum contacts with Spain are determined to exist by a Spanish judge ruling on a dispute. In either case, although a distribution contract does not strictly fall within the scope of the Agency Contract Law’s terms, a long line of Spanish case law holds that where the particular contract and circumstances are similar to those that underly the logic and language of the Agency Contract Law, this law may be applied to other types of contracts. Application of the Agency Contract Law can have significant economic consequences, particularly those related to the manufacturer’s eventual obligation to pay compensation to the distributor for goodwill (Article 28) and further compensation for investments made (Article 29). Our readers can find a more detailed description of the Agency Contract Law’s definition of an agency contract (as distinguished from one of distribution, franchise, etc.), as well as both of these “indemnities” in a separate article at www.plehnlaw.com/agency-and-distribution-agreements/
While in the case of agency contracts these indemnities are considered public policy and therefore cannot be contractually excluded, in the cases of contracts falling outside this categorization, these indemnities and their economic consequences can be avoided if the parties specifically so provide. We will address this question further, below.
At this juncture, a brief clarification is required. The Agency Contract Law refers to the compensation provided for in Articles 28 and 29 as “indemnizacion” and herein we use the most direct and accurate translation to English of that Spanish word: “indemnity”. Nonetheless, the original Spanish word is a misnomer as the indemnización/indemnity is not paid to compensate a loss incurred by one of the parties (damages), but rather it is simply a compensation established for reasons of public policy. Both parties to a distribution agreement can sue for damages, but only the agent (or distributor in our case) may be entitled to the Article 28 and/or Article 29 “indemnities” in addition to damages.
2. Application of the Spanish Agency Contract Law by way of “analogy” to distribution agreements.
Distribution agreements, generally understood to be those where a distributor purchases and re-sells products at its own risk, are not currently regulated in Spain by any specific legislation, although a number of legislative projects are currently underway. As a result, this type of contract is subject to general contracting principals embodied in the Spanish Civil Code, and negotiating parties are relatively unimpeded in the exercise of their
freedom of contract, provided they do not run afoul of unfair competition laws and basic concepts of commercial good faith. However, when the Spanish courts determine that the particular distribution contract and surrounding circumstance trigger considerations similar to those underlying the Agency Contract Law (“identidad de razón” or common logic), the courts may well apply Article 28 (indemnity for goodwill) and Article 29 (indemnity for investments made) by way of “analogy”.
In determining whether these requisite circumstances are present in a distribution contract, the Spanish courts look to the specific language of Articles 28 and 29 of the Agency Contract Law, as well as the two policies that underly their language, the perceived need i) to protect the weaker party, almost always the agent, and ii) to compensate the agent for the lasting benefits it has created for the manufacturer.
As a general rule, Spanish courts tend to view the distributor as the weaker party, but this may vary from case to case. Obviously, the distributor depends on the product of the manufacturer to generate its revenues. But this economic dependance may vary significantly in degree. Where a distributor represents multiple products or even products which compete with one another (i.e. no exclusivity in the representation of the manufacturer’s products), the case for the court to determine that the distributor is the weaker party in need of protection is less strong. Similarly, if the manufacturer’s products only constitute a small percentage of the distributor’s revenues, the same may be true. Further, a distributor with an extensive network and which is able to easily replace the manufacturer’s products, will be less likely to obtain protection under the Agency Contract Law.
The second leg for showing “identidad de razón” or similar underlying logic permitting the application of Article 28 (but less so with regard to Article 29) is the perceived requirement to compensate the distributor for the lasting benefit it has created for the manufacturer as a result of its commercial efforts. Usually, this analysis is very much akin to the one applied to the agent in the case of agency contracts, with slight modifications given the somewhat different structure of distribution contracts. The court will first determine whether there has indeed been a substantial increase in sales for the manufacturer. It will also consider whether these sales are a result of the distributor’s own efforts in advancing the manufacturer’s brand recognition or whether they derive from the manufacturer’s strong branding, global advertising etc. Further, the court will seek to determine whether the increased sales are likely to be repeated, whether the products in question involve brand loyalty or inevitably involve post-sales technical sales support as in the case of automotive sales. One-off sales may not be viewed as meriting the indemnity.
As to Article 29 regarding investments made by the agent (again, distributor in our case), the Agency Contract Law requires the manufacturer to compensate the agent when it unilaterally terminates a contract of undefined duration leaving the agent insufficient time to amortize investments made or costs incurred pursuant to the contract. Here again, the underlying logic is really one of protecting the weaker party. The agent, or in our case the distributor, is viewed as having a reasonable expectation that the manufacturer will not terminate the agreement too early in the relationship, especially when it has imposed certain investments obligations upon the distributor. Interestingly, this protection may be viewed by the courts as even more compelling in distribution contracts than in agency
contracts, especially when distributors must make significant investments to adapt to a pre-existing extended commercial network with a recognized branding.
3. Contractually excluding application of the Agency Contract Law to distribution contracts.
As mentioned above, the Agency Contract Law is only mandatorily applicable to agency contracts as these are defined in this law. In such cases, the law’s provisions, based on public policy, simply overrule any conflicting contractual terms. However, once a contract is determined to be outside the definition of an agency contract, this public policy imperative does not come into play and the Spanish courts have determined that the parties are free to contractually exclude its terms. Should the parties fail to do so in unequivocal terms, the door is left open to judicial interpretation and precedent. Uncounseled parties may be unaware of this potential situation, as it is not a consequence of codified legislation and requires a knowledge of judicial precedent, typically only within the ken of local counsel. Even “How to do Business” guides may fail to alert manufacturers entering the Spanish market.
Clearly, the safest way to exclude the application of the Agency Contract Law is a belt and suspenders approach, both by making specific mention of the law itself and by generically describing and excluding the type of compensation described in Articles 28 and 29. This generic description is particularly important if there is any doubt as to which national law may be applicable and before which courts a dispute may be decided. The concepts provided for in the Agency Contract Law are largely derived from the corresponding European-wide directive (Counsel Directive of 18 December 1986, on the coordination of the laws of the Member States relating to self-employed commercial agents 86/653//EEC) and therefore these concepts are found, in one form or another, throughout the member states of the European Union. As Spanish counsel, we cannot specifically opine on possible applications of agency law concepts to distributorship agreements in other jurisdictions, but clearly including a generic description, as well as specific mention of the Agency Contract Law, is likely to offer greater protection.