The international distribution contract in Spain: regulation, obligations and compensation

Which regulations govern the distribution contract? What are the main obligations of the parties in a distribution contract? Is the distributor entitled to goodwill compensation?

The distribution or commercial concession contract is a commercial cooperation agreement between independent business operators, whose main objective is the resale or distribution of products within a specific territory. Under this agreement, the distributor (or concessionaire), generally with an exclusivity clause, undertakes to promote the sale and after-sales service of the grantor’s products in a specific area, assuming the commercial risks, without receiving any payment or remuneration from the grantor for purchasing its products.

The distributor acts in its own name and on its own account, purchasing and subsequently reselling the grantor’s products and therefore obtaining profits solely through the resale margin.

The differences with other agreements that also fall within the category of commercial cooperation or distribution agreements are evident:

• For example, under an agency contract, the agent undertakes to promote, on behalf and in the name of another business operator, and normally without assuming the risk of the transactions, contracts, acts or other commercial operations.
• Whereas under a franchise agreement, the franchisee, although acting in its own name and on its own account, undertakes to sell the same products and services offered by the franchisor, following clearly defined guidelines to ensure uniformity of the business, and in return for belonging to the distribution network pays a fee or periodic royalty for the use of the franchisor’s trademark.

Which regulations govern the distribution contract in Spain?

The distribution contract is atypical, in the sense that there is no specific regulation in the Spanish legal system. However, on the one hand, there have been attempts to enact specific legislation and, on the other hand, there are rules which, although by analogy or with interpretative or supplementary effects, may be applied to this contract.

With regard to attempts to regulate the distribution contract, the following should be mentioned:

• The Draft Law on Distribution Contracts of 29 June 2011 (published in the Official Gazette of the General Courts – Congress of Deputies, No. 138-1);
• The Draft Bill of the Commercial Code of 29 June 2013 (Propuesta_código_mercantil (mjusticia.gob.es));
• Law 2/2011, of 4 March, which introduced the first additional provision of the Agency Law with the aim of regulating compensation in favour of vehicle concessionaires. The application and legal effects of this legislation were, curiously, suspended one month later by Law 7/2011, of 11 April, “until the entry into force of the Law on commercial distribution contracts”.

With regard to other rules that may apply to one or more aspects of the distribution contract, we highlight:

• Law 12/1992, of 27 May, on the agency contract;
• The Civil Code and the Commercial Code;
• Law 7/1996, of 15 January, on the Regulation of Retail Trade;
• Law 16/1989, of 17 July, on the Defence of Competition and Law 3/1991, of 10 January, on Unfair Competition.

And at European level:

• Articles 101 and 102 of the Treaty on the Functioning of the European Union;
• Regulation 2022/720 on block exemption for vertical agreements;
• Brussels I Regulation (44/2001) with regard to jurisdiction;
• Rome I Regulation (593/2008) with regard to the law applicable to the contract.

Judicial interpretation of the distribution contract

As it is an atypical contract, case law has been fundamental in defining and clarifying the main characteristics of the distribution contract.

For example, the Supreme Court, in its judgment no. 332/2009 of 18 May (Roj STS 2906/2009; Appeal no. 1439/2004), when analysing a dispute in which one of the parties claimed the existence of a distribution contract, clarified that the existence of a certain power of decision, direction and supervision by the grantor, while respecting the independence of the parties, is a substantial and necessary feature for a commercial distribution contract to exist, and not merely a succession of contracts for the sale of products for resale:

“The distribution contract is an atypical contract, falling within the so-called commercial cooperation agreements, as is the case with agency and franchise agreements, in which the idea of mutual cooperation between business operators is present, for an indefinite or definite period but with a vocation for stability, for the distribution of a product, brand or service within an agreed geographical area, on an exclusive basis or otherwise, for the benefit of the principal, who, without having to bear the costs of a distribution network, will achieve this same aim thanks to the distributor, who, for its part, acts in its own name and on its own account by purchasing outright from the grantor and reselling, assuming the risks of marketing (among others, Judgment of 20 July 2007 with reference to those of 8 November 1995 and 1 February and 31 October 2001), which differentiates it from agency contracts, whose purpose is the promotion of acts or commercial transactions and where the independence of the agent is essential, as an independent intermediary who assumes no type of risk). Moreover, the appellant entity cannot overlook that another common feature of cooperation contracts, particularly applicable to distribution contracts, with or without exclusivity, and which distinguishes them from a mere indefinite succession of sales contracts, is the subjection of the collaborator to the principal business operator, who is entitled to issue instructions and set the conditions under which the distribution of products is to be carried out and, as rightly pointed out by the Court of Appeal, even where there is no exclusivity agreement between the two business operators, this higher level of direction and supervision by the manufacturer, producer or grantor is usually reflected in the establishment of sales and purchase quotas, without prejudice to other manifestations. Therefore, in order to speak of a distribution contract, it is necessary for the distributor to submit to the power of decision, direction and supervision corresponding to the business operator with whom it collaborates, even though the distributor acts with third parties in its own name and on its own account. This is so even in cases of non-exclusive distribution, since, although the autonomy of the collaborating business operator is greater in authorised or selective distribution, this does not mean that it is not required to comply with the instructions or indications of its principal.”

In judgment no. 697/2014 of 11 December 2014 (Roj STS 5566/2014; Appeal no. 1068/2013), the Supreme Court lists the main aspects of the distribution contract, recalling that:

“Despite being atypical, due to the lack of specific regulation, its frequent use has made it possible to achieve a form of social typification, and academic and case law doctrine have highlighted its most relevant elements, distinguishing it from other business cooperation contracts: (i) the distributor acts in its own name and on its own account, assuming the risk of resale, which makes it possible to distinguish this contract from agency contracts (Supreme Court judgments of 31 October 2001 and 12 June 1999); (ii) the distributor’s remuneration, unlike that of the agent, consists of the resale margin of the products marketed from the supplier or principal (STS 547/2013, of 2 October); (iii) the object of the contract consists of promoting the distribution or resale of the products, fostering their placement on the market, and generally integrating into the grantor’s distribution network; (iv) they are commercial contracts of continuous duration and usually adhesion contracts, with the aim of achieving homogeneity throughout the national territory; (v) they are contracts that usually involve the assignment of rights over intangible assets (trademarks, logos, know-how…); (vi) they are contracts based on trust, taking into account the distributor’s technical and professional capabilities; (vii) normally, a reciprocal exclusivity applies between manufacturer or supplier and distributor, in relation to the assigned area in which the former may not sell, and the competitor’s products that the latter may not market (Supreme Court judgments of 5 October and 18 December 1995).”

However, very often the Supreme Court has been called upon to decide on the applicability by analogy of the agency contract regulations relating to goodwill compensation in the event of termination of the contract. In this regard, it should be recalled that such compensation may be claimed by the distributor only if the parties have not excluded it, either expressly or implicitly, through another alternative agreement for the settlement of the contract. Where the regime of the Agency Contract Act applies, the distributor must prove, pursuant to Article 28:

I. that it has brought in clients or increased business with pre-existing clients;
II. that the distributor’s activity may continue to provide substantial benefits to the principal; and
III. that the compensation is equitable.

Finally, with regard to the determination of compensation, we may refer to a recent ruling of the Supreme Court no. 994/2023, of 13 June (Roj STS 2580/2023; Appeal no. 5713/2019), which stresses the importance of correctly classifying the contract, since, in the case of a distribution contract, the calculation of the compensation must be based on the distributor’s net margin:

3.- The classification as one or another type of commercial or business cooperation contract is relevant, given that, although the case law of this chamber considers the goodwill compensation under Article 28 of the Agency Contract Act (LCA) to be applicable to distribution contracts, provided that the requirements laid down in that provision are met, the method for calculating the compensation is not the same, because the distributor does not receive remuneration, but rather obtains its profit through the commercial margin applied to the resale of the products. This led this chamber at the time to consider whether the compensation should be based on the gross margin (i.e. the difference between the purchase price and the resale price) or the net margin (that is, the percentage of profit remaining for the distributor after deducting expenses and taxes).

In this regard, judgment no. 317/2017, of 19 May, citing previous case law, held:

“The criterion established in the aforementioned Article 28 of the Agency Contract Act (LCA) must be used as a guiding principle, but calculated, instead of on the commissions received by the agent, on the net profits obtained by the distributor [in line with Supreme Court judgment 296/2007, of 21 March], that is, the percentage of profit remaining for the distributor after deducting expenses and taxes, and not on the commercial margin, which is the difference between the purchase price of the goods from the supplier and the retail sale price [in line with Supreme Court judgment 346/2009, of 20 May]. The resulting amount shall have the nature of a maximum.”

4.- As a consequence of the above, the Provincial Court should have expressly classified the contract as an agency or distribution contract or, if it considered that it had mixed features, determined which were more relevant or prominent of one or the other type, in order to calculate the goodwill compensation using one or the other of the settlement systems indicated above.

Obligations of the parties under the distribution contract

The main obligation of the business owner or grantor is to sell or make available to the concessionaire the products, goods or services, as well as the information and instructions necessary to carry out their marketing.

The main obligation of the distributor is to pay for the goods or services as agreed and to inform the grantor about the distribution activities carried out.

In addition to these main obligations, distribution agreements, especially at international level, are characterised by increasing complexity in their drafting, reflecting the parties’ desire to regulate as many aspects of the contractual relationship as possible. Thus, clauses appear governing training and/or technical assistance to enable the distributor to operate, as well as others defining the materials/brochures/manuals and other documents necessary for the marketing of the products.

Without claiming to be exhaustive, other aspects include the fixed or indefinite duration of the relationship, the possibility of renewal, territorial delimitation, determination of product prices with the granting of possible discounts or rebates (rappels) and, at the same time, the obligation to reach minimum purchase levels, exclusivity which may be fully reciprocal in the sense that the grantor may not directly market its products in the territory granted to the distributor, the use of industrial and intellectual property rights, the maintenance of a minimum stock and the possibility or obligation on the part of the grantor to repurchase the products upon termination of the contract, the conditions for early termination, as well as the possibility of compensation upon termination.

Applicable law and jurisdiction in distribution contracts

Jurisdiction

The choice of the applicable law and the determination of the competent jurisdiction are crucial aspects when drafting an international distribution contract. Moreover, this is an issue that often generates debate and difficulties during negotiations, as each party tends to prefer the application of its own legislation and the submission of any dispute to the courts of its own country.

For practical reasons, it is always advisable for the competent courts to be located in the country whose law has been chosen.

If this is not possible, an alternative is to resort to alternative dispute resolution methods such as mediation and international arbitration, even through a stepped clause providing for the use of arbitration only if mediation does not achieve the expected results.

If the parties have not reached or have not been able to reach an agreement in this regard, the criteria provided for at international level shall apply. In this respect, the Brussels I Regulation (44/2001) establishes international jurisdiction in distribution contracts according to the defendant’s domicile.

The Regulation also provides for a special jurisdiction based on the place of performance of the contractual obligation. In distribution contracts involving the sale of goods or the provision of services, the place of performance shall be, respectively, the State where the goods were delivered or should have been delivered, or where the services were provided.

If the defendant is domiciled in a third State outside the European Union, the Organic Law of the Judiciary (LOPJ)provides that, in the absence of an agreement, Spanish courts shall have jurisdiction if the defendant is domiciled in Spain or if the contractual obligations arose or must be performed in Spain.

Applicable law

As regards the applicable law, for contracts entered into as from 17 December 2009, the applicable law is governed by the Rome I Regulation (593/2008). This Regulation establishes party autonomy as an absolute general principle, allowing the parties to choose the law applicable to the contract, even for different parts thereof. In addition, the parties may change the applicable law during the term of the contract.

In distribution contracts where no applicable law has been agreed, the Rome I Regulation provides that the law of the country where the distributor has its habitual residence, determined at the time of conclusion of the contract, shall apply. For legal persons, this refers to the place of their central administration, while for natural persons, it refers to the place where they carry out their professional activity.

However, if the contract has closer connections with another legal system, the law of that system may apply. In any event, the application of the chosen law may not contravene overriding mandatory provisions, which are fundamental rules for the protection of public or supra-individual interests in a country.

Final key points on the distribution contract in Spain

In the case of an international distribution contract, if the parties have not agreed on the applicable law, the contractual relationship will be governed by Spanish law if the distributor is established in Spain. In this case, the parties will enjoy broad autonomy to determine the content of their reciprocal obligations, as it is an atypical contract subject only to the principles of good faith and competition law. This autonomy may even extend to the settlement of the contract in the event of termination, expressly excluding goodwill compensation. However, in the absence of an agreement, the distributor may claim goodwill compensation to the extent established by Spanish case law.

Our firm has experience in drafting international distribution contracts, as well as in defending the interests of distributors and/or grantors before courts and arbitral tribunals. If you are interested in obtaining further information, we will be pleased to provide it. You may contact us to request a free quote tailored to your needs.