distribution contracts

Compensation for Clients: What is there to compensate? Supplier’s Enrichment. Debtor’s losses.

What do contracts bind to and do they bind only to what has been agreed, or do they also bind to the consequences of what has been agreed? The indemnity must compensate the enrichment of the supplier. Indemnity must compensate for the imbalance of successive transactions. The supplier's enrichment does not lead to the distributor's losses. Can the distributor continue to benefit from this clientele in the future?

The Supreme Court’s jurisprudence states that the Agency Contract Act (ACA) is analogously applicable to distribution contracts. However, its application is not automatic. For Article 28 of the ACA to be applicable to distribution contracts, the following must be complied with:

  1. unilateral and unjustified termination by the supplier.
  2. the parties have not agreed on the exclusion of indemnity.
  3. that the distributor had  generated the creation of new clientele for the supplier or that it has caused an increase in the operations with the previous clientele.
  4. that the grantor continues to take advantage of the clientele or to receive substantial advantages.

In each specific case, it must be verified whether the requirements established in the ACA are met in order to grant the indemnity for clientele or any other compensation. The distributor will have to prove the effective contribution of clientele and its potential use by the grantor.

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To what do contracts bind: do they bind only to what has been agreed, or do they also bind to the consequences of what has been agreed?

The answers to these questions can be found in Article 1258 CC. Jurisprudence recognizes the applicability of compensation for clientele with respect to distribution contracts on the basis of this article. Contracts are bound to what has been expressly agreed and to all the consequences which, according to their nature, are in accordance with good faith, usage and the law.

Contracts also bind to the consequences of what has been agreed. From this affirmation comes the equitable remedy to the imbalance of the benefits by supervening causes in the contracts of continual performance. In the distribution contract this imbalance appears in the asset situation of each of the parties upon termination of the contractual relationship. Moreover, this imbalance is not due to extraordinary circumstances but to the ordinary execution of the contract itself. Therefore, customer indemnity is a consequence in accordance with the nature of the distribution contract and with good faith.

What does the termination of the distribution contract intend to compensate? Can the distributor continue to take advantage of this clientele in the future?

The jurisprudence of our Supreme Court recognizes the right to compensate for clientele in cases of lack of notice or abuse of rights in the termination of the relationship. What justifies this compensation is not the similarity between the agency contract and the distribution contract. What justifies the compensation is that the contract obliges to consider as a common asset the clientele created or increased thanks to the distributor’s efforts.

The basis of the indemnity is to compensate for an unpaid service at the time of termination of the contractual relationship. It is based on compensating the supplier’s prospect of continuing to benefit in the future from the commercial relations established by the distributor. It is a matter of liquidating the common asset formed by the portfolio of customers contributed by the distributor to the supplier, an asset that ceases to be common when the relationship is dissolved.

Supplier’s enrichment and distributor’s losses

The distributor’s right to obtain compensation is based on the unjustified nature of the enrichment acquired by the grantor. This enrichment is not correlated to the distributor’s losses. It is a compensation for the efforts of others and not a compensation for the impoverishment of the other party.

If this article has been of interest, we also suggest you to read the following article published on our website: Extinction of a distribution contract: Unfair Competition?

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