Sales (Forms of Distribution)
1. Object and goal
Forms of distribution in a broad sense comprise all acts, undertakings and relationships regarding the path of a product from the producer to the ultimate processing or consuming usage. An entrepreneur has the option to confer all or at least most of his distributing tasks to legally and economically non-independent distributive organizations (direct distribution) or to entrust those tasks entirely or mainly to external, legally and economically independent distributive organizations (indirect distribution). The law of distribution focuses on questions arising from indirect distribution; it is concerned with the law of distributive contracts ranging from simple supply contracts (including those with specialized retailers) as well as more complex exclusive distribution or purchasing agreements and selective distribution agreements (distributorships or distribution in a narrow sense) to commercial agents and franchising. Direct distribution through self-owned organizations (subsidiaries or branches) or the occurrence of travelling salesmen is becoming less frequent. In contrast, new forms of distribution such as factory outlet centres and tele- or internet shopping have emerged causing questions primarily concerning consumer protection (consumers and consumer protection law) to arise. Also noteworthy is multi-level marketing, a form of distribution integrating the ultimate buyer or third parties in the marketing strategy of the producer or entrepreneur. Multi-level marketing is to be distinguished from so-called pyramid schemes, in which the business focus is not on distribution of goods or the provision of services, but on recruiting new members of the distributive organization. In civil law these forms of distribution frequently raise questions regarding unfair competition and illegality of contracts, especially if new salespeople are asked to pay for their own training and marketing materials, or to buy a significant amount of initial stocks.
The law of distribution is characterized by the era in which it developed. At the end of the 19th century most industries constituted seller’s markets where on the whole, the producers had little problem selling their goods; but rather the problem was producing large enough volumes to satisfy demand. Consequently, the focus of producers’ interest was on production and not on distribution and marketing since in a seller’s market the prevailing bottleneck was production. These economic findings certainly influenced the system of distribution and marketing: trading was relatively simple and unsophisticated and the assortment of goods was limited because there was only a relatively small number of suppliers, and the producers saw no incentive in diversifying their line of products for a market which was far from being saturated. Accordingly, the law of distribution that emerged at this time in continental Europe bore a rather simple appearance. A prime illustration of this can be found in the commercial codes of Germany and Austria (Allgemeines Deutsches Handelsgesetzbuch (ADHGB) where, as the only intermediary permanently integrated in the distribution of an entrepreneur’s products, only commercial agents were regulated and hence they are considered the prototypical figure for the law of distribution. Thus, central to the law of distribution are issues which also play an important role in the law of commercial agents. Since the intermediaries in distribution, especially the distributors in selective distribution systems and franchisees, often have to invest a considerable amount of money at the commencement of their operation and only gradually develop a customer base, there is a need for protection mechanisms before corresponding contracts are concluded and in case of termination of those contracts.
2. Trends of international legal development
No European legal system possesses a legal regime which covers all forms of distribution. Rather, the general rules of contract law apply to the respective legal relationships with regard to formation, effect and performance of distribution contracts. Regarding forms of distribution which firmly integrate the intermediary in the distributive system of the entrepreneur, these rules are supplemented by regulations for the protection of the intermediary prior to the conclusion of the contract (pre-contractual information duties of the principal) and at the time of the termination of contract (requirement of previous notice and indemnity for goodwill).
Consequently, many of the European countries developed mandatory regulations establishing a certain protection of commercial agents. However, in view of the fact that a number of other European countries placed an emphasis on freedom of contract and so did not restrict the parties in the formulation of contracts, with the result being a distortion of competition in cases of transnational transactions, the laws of commercial agency in the Member States were eventually harmonized by Dir 86/653 of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents.
Additionally, in France, Spain, Italy and most recently in Belgium, the law of franchising has been codified with a focus mainly on pre-contractual information duties. The provisions refrain, however, from regulating the indemnity for goodwill at the time of the termination of contract, a question to which the laws of the Member States offer diverging answers. Jurisprudence and scholarship discuss an analogous application of the rule of indemnity for goodwill in the law of commercial agency, but a clear tendency on this matter is not identifiable. Answering the question whether the franchisee may claim indemnity for goodwill or damages depends on the specific formulation in the franchise agreement and on the circumstances surrounding the termination of the agreement.
This same question also arises in relation to distributorship agreements, a field scarcely codified by specific legislation in any of the European countries. Belgium is the only European legal system providing particular legal protection for distributors on termination of distributorship agreements (Belgian law of 27 July 1961, revised on 13 April 1971). Accordingly, exclusive distributorship agreements for an indefinite period of time cannot be terminated by either party, except with a reasonable period of notice or a fair indemnification to be agreed upon between the parties at the conclusion of the agreement, unless there has been a serious breach of duty. Besides this indemnification the distributor is entitled to an equitable supplementary indemnity for goodwill, expenses and redundancy payments.
In the other European countries the legal situation is inconsistent and barely assessable. In Austria a differentiated approach is taken regarding an analogous application of the rule on indemnity for goodwill in commercial agency law on distributorships. The Austrian Supreme Court of Justice has held that a claim by the distributor for payment of indemnity by the supplier upon termination of the agreement is to be granted if the distributor-supplier relationship has the same characteristics as a commercial agency agreement (particularly regarding the integration of the distributor into the entrepreneur’s sales organization, the undertaking of particular tasks, the duty to observe instructions and the prohibition of competition) and if denial of the claim would contradict the aims of the Austrian Handelsvertretergesetz. This is deemed to be typically the case in automobile distributorships.
In France there is no particular protection against dismissal of the distributor. Instead of indemnity for goodwill, French law gives the distributor a claim for damages in case of the principal’s disregard of the duty to previous notice (rupture brusque) and in case of abusive dismissal (rupture abusive). In Spain distributorship agreements for an indefinite term may be terminated at any time, but termination must not be contrary to good faith (bona fide), which is especially the case if there is no reasonable prior notice by the terminating party. A right of compensation has been admitted by Spanish courts in case of abusive termination and if the terminating principal objectively obtains an undue benefit (enriquecimiento injusto) from the termination, which is deemed to exist in connection with the clientele generated by the distributor.
In the Netherlands termination of distributorship agreements is solely limited by the principle of reasonableness and fairness, which means that agreements of indefinite duration may generally be terminated provided a reasonable notice period is taken into account. The distributor has no legal right to indemnity for goodwill. However, since the contract must be performed on the basis of the principle of reasonableness and fairness, it is possible that, in light of the circumstances, damages will be due upon termination. However, clear guidelines have still not been developed by the judiciary regarding the requirements of the claim for damages. In Denmark there are no legal requirements for the termination or notice period. However, jurisprudence has developed according to which the termination period cannot be shorter than six months. Danish case law has not awarded indemnity for goodwill, but in cases of termination without prior notice distributors have been awarded compensation for ‘goodwill’ corresponding to the profit that they would have made during the termination period, namely damages for loss of expected profit.
In Switzerland the courts have ruled that the provisions of the Code of Obligations relating to the termination of an agency contract must also apply to exclusive distributorship agreements. Conversely, the courts refused to grant indemnity for goodwill to the distributor by analogous application of the rules of commercial agency. However, in the case of unjustified immediate termination or in a case of termination on legitimate grounds, the innocent party is entitled to claim for the loss of profits occurring as a result of the early termination of the contract. In English law, distributorship agreements may be terminated under the condition of reasonable prior notice by the terminating party. Indemnity for goodwill is not granted. In Finland, Norway and Sweden distributors are not subject to any particular legal protection.
Another important issue in the law of distribution, and especially in distributorship agreements, are clauses which restrict competition. The legitimacy of such clauses has to be examined with regard to national as well as European competition law. First, the question of the applicability of the corresponding competition rules to the specific intermediary arises (competition rules (applicability)). Exemptions for vertical agreements in EU competition law containing clauses which restrict competition are subject to Reg 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices (block exemption regulations). Furthermore, the European Commission has issued guidelines in which it further defines the application of Art 101 TFEU/81 EC on vertical restraints.
3. Unitary law
In the DCFR (Common Frame of Reference (CFR)) commercial agency, franchising and distribution are subject to a separate set of rules in part E of book IV on specific contracts. Article IV.E.-1:101 to 2:402 DCFR contain general provisions determining duties of the contracting parties and stipulating regulations for termination which are applicable to all three forms of distribution. In these general provisions, mandatory pre-contractual information duties which are characteristic in the law of franchising are also made applicable to commercial agency and distributorship. Article IV.E.-4:102 DCFR further specifies these information duties for franchise agreements. Regarding the legal consequences in case of the non-performance of information duties, reference is made to chapter 7 in book II of the DCFR.
The legal regime on the unilateral termination of a contract for an indefinite period clearly follows the rule in Dir 86/653 of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents. Article IV.E.-2:302 DCFR stipulates mandatory prior notice requirements whose period depends on the duration of the contractual relationship. An indemnification for goodwill is also found in the general provisions of the DCFR. However, the claim is mandatory only for commercial agents in accordance with Art IV.E.-3:312 PEL CAFDC.
Wolfram Küstner and Karl-Heinz Thume, Handbuch des gesamten Außendienstrechts, vol 3: Vertriebsrecht (2nd edn, 1998); Geert Bogaert and Ulrich Lohmann, Commercial Agency and Distribution Agreements (3rd edn, 2000); Michael Martinik, Franz-Jörg Semler and Stefan Habermeier (eds), Handbuch des Vertriebsrechts (2nd edn, 2003); Martin W Hesselink and others, Principles of European Law Commercial Agency, Franchise and Distribution Contracts (2006).