Extinction of a distribution contract: Unfair Competition?

When can the termination of the distribution contract be considered unfair competition? What criteria should be followed (Article 16 LCD or Article 5 LCA)*? Can an exclusive distribution contract be terminated for lack of confidence? And for change of majority shareholder? The distribution contract is a collaboration contract between businessmen. In general, it can be terminated without just cause. Unjustified termination is not unfair, unless it is terminated in bad faith, lack of notice or through economic dependence.

Termination of distribution agreement: Unfair Competition?

The indemnity for clientele is not exclusive to agency agreements. As reiterated by the case law of the Supreme Court, the analogous application of the LCA to distribution contracts is not automatic. The law shall be applied if, in the specific case, the requirements set forth in Article 28 of the ACA are met. The distributor seeking the application of this law must prove the effective contribution of clientele and their potential exclusive use by the grantor.

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When can the termination of the distribution contract be considered unfair competition?

Any termination of commercial relations does not lead to the application of the LCD nor to the declaration of the conduct as unfair. It is essential  that there has not been written and precise notice at least six months in advance. However, it is the economic dependence that leads to consider the break-up of commercial relations as unfair. This situation, which must be proven, derives from the dominant position in the market. Economic dependence assumes that the company does not have an equivalent alternative for the exercise of its activity.

Which criterion should be followed (Article 16 LCD or Article 5 LCA)?

As we have said, case law shows that the claim for termination of a distribution contract can be based on the LCA. However, this claim is also contemplated in LCD as long as it is channeled through Article 16 LCD and not through Article 5 LCD.

Jurisprudence defines the limits to qualify this conduct as unfair. Article 5 LCD does not serve to sanction conducts are already covered by other specific precepts of the Law. The application of this article has to be made to suppress conducts that have not been subsumed in other assumptions uniquely typified in other provisions. The recourse to Article 5 LCD makes it necessary to identify the reasons on which the disloyalness of the conduct is based. It is not sufficient to cite the precept in the grounds of the claim. It can only be applied when the act that infringes it is expressly specified and the conduct is not typified under other rules.

In view of the foregoing, the criterion to be followed is that contemplated in article 16 LCD. The termination of the commercial relationship by surprise may be considered as an abusive exercise of rights. This power of termination by surprise may constitute unfair conduct in bad faith, which may give rise to compensation when it causes damages.

Can an exclusive distribution agreement be terminated due to lack of trust and confidence, or due to a change of majority shareholder?

The collaboration contract or also known as distribution contract is an “intuitu personae” contract. It is a contract that can be terminated without just cause. In addition, there may not be a contractual duration, but rather a contract of indefinite duration. Therefore, the termination of the relationship between the parties cannot properly be questioned. However, the decision to terminate these relations without notice constitutes an abusive termination of the contract.

Partnership contracts are based on mutual trust, both in terms of personal characteristics and the structure of their business organization. The contractual relationship between the parties to a distribution contract is based on the trust inherent to a lasting and stable relationship. This trust will break down when one of the parties fails to meet the expectations of the other party in the performance of its contractual commitments. A motivated breach of trust may be sufficient cause for termination of the contract.

In distribution contracts the change in the person of one of the parties by assignment, if there is agreement of all parties, usually involves the conclusion of a new contract. This is because the trust is not transferred without the consent of all parties to the change of one of the contracting parties. It is not easy to prove that the trust generated before the change of the majority partner has been transferred to the distribution company in which the distributor has a minority position. The burden of proving the pre-existence of the distribution contract and its subsistence lies with the party alleging it.

If this article has been of interest, we also suggest you to read the following article published on our website:

Differences between an Agency Agreement and a Distribution Agreement.

Is it possible to waive the compensation for clients in the agency contract?.

*LCD: Ley de Competencia Desleal = Unfair Competition Act/LCA: Ley del Contrato de Agencia = Agency contract law).

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