New Supreme Court decision

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					New Supreme Court decision on indemnification
upon termination of distribution agreements

Paolo Bottini

ACC Event, 18 June 2009

• Introduction

Ø Agency vs. Distribution Agreement

Ø Art. 418u SCO

• New Supreme Court Decision (DTF 134 III 498)

Ø Facts

Ø Requirements for compensation

Ø Mandatory claim

Ø Calculation of the compensation

• Conclusion
                     Agency vs. Distribution Agreement

                    • A distribution agreement is an agreement according to which
                      a distributor buys products from a supplier and then sells them
                      to its customers in its own name and on its own account.
                      Because there are two separate sale contracts (from the supplier
                      to the distributor and from the distributor to the customer), the
                      risk of resale and non-payment is borne by the distributor.

                    • An agency agreement is an agreement according to which an
                      agent acts as an intermediary on behalf of a supplier in the
                      supplier name and for its account. Because the sale contract is
                      between the supplier and the customer, the risk of non-payment
                      is borne by the supplier.                                                                     3
                     Art. 418u SCO

                    • According to art. 418u of the Swiss Code of Obligations (SCO), if
                      an agent, through his activity, has substantially increased the
                      principal's clientele and if, even after termination of the agency
                      relationship, the principal benefits substantially from the
                      business relations with the acquired clientele, the agent has an
                      inalienable right to adequate compensation to the extent that
                      such compensation is equitable.

                    • Until recently, the Swiss Federal Supreme Court (SFSC) has
                      refused to expand the scope of application of art. 418u SCO to
                      distribution agreements.                                                                      4
                     New Supreme Court Decision

                    • Two exclusive distributors claimed for a compensation for
                      customers upon termination of their exclusive distribution
                      agreements with a Swiss supplier.

                    • The courts of lower instances rejected the claims.

                    • The SFSC ruled that, under certain circumstances, exclusive
                      distributors have a mandatory compensation claim for clientele
                      upon termination of the distribution agreement.                                                                      5
                     New Supreme Court Decision
                     Requirements for compensation

                    (1) Integration of the distributor in the supplier's distribution

                    (2) Increase of the supplier's clientele through the distributor's

                    (3) Substantial benefits for the supplier;

                    (4) Compensation is not inequitable.                                                                        6
                      Requirements for compensation
                      (1) Integration in the distribution system
                    • A compensation is due only if the distributor is integrated into
                      the supplier's distribution network and, due to its limited
                      economic freedom, its position is similar to the position of an

                    • Contractual obligations of the distributor evidencing such an
                      integration are:

                    Ø Obligation to purchase a minimum quantity of products;
                    Ø Obligation to accept unilateral amendments as to price and terms of
                    Ø Obligation to accept the discontinuation of production and/or supply of
                    Ø Obligation to invest certain amount in advertising activities;
                    Ø Obligation to retain a minimum quantity of products in stock;
                    Ø Obligation to submit sales reports and to inform about competitors'
                    Ø Non-competition clause after termination;
                    Ø Obligation to disclose the names of the customers.                                                                               7
                     Requirements for compensation
                     (2) Increase of the clientele

                    • The activity of the distributor shall have increased the supplier's
                      customer base (in terms of growth rate of customers and/or

                    • There shall be a causal connection between the activity of the
                      distributor and the increase in the customer base.

                    • In the case at hand, the brand was virtually unknown at the
                      beginning of the distribution agreement. Therefore, the SFSC
                      has stated that the increase had been due to the activities of the

                    • Issue: Evidence of the connection between distributor's activities
                      and increase in case of already-known brands?                                                                           8
                     Requirements for compensation
                     (3) Substantial benefits for the supplier

                    • The supplier benefits from the increase only if the customers
                      acquired by the distributor remain loyal to the product.

                    • A significant benefit is given only if, after termination of the
                      distribution agreement, the customers will purchase the same
                      products (directly from the supplier or from a new distributor).

                    • Otherwise, if the customer still remain loyal to the distributor,
                      the supplier will not benefit from the increase.                                                                         9
                      Requirements for compensation
                      (4) Compensation not inequitable

                    • As last condition, a compensation for clientele must not be

                    • A compensation may be deemed inequitable if:

                    Ø The termination of the distribution agreement is due to the distributor's

                    Ø The distributor terminates the agreement without cause;

                    Ø The distributor received above-average compensation during the term of
                      the agreement;

                    Ø The distribution agreement lasted for a long term and the distributor has
                      been in a position to benefit from the customer base for a long period of
                      time.                                                                                 10
                     New Supreme Court Decision
                     Mandatory claim

                    • If the above mentioned requirements are met, the claim for
                      clientele compensation is mandatory and can therefore not be
                      validly waived in the distribution agreement.

                    • Any waiver in such agreements would therefore be without

                    • On the contrary, a waiver agreed to after termination of the
                      distribution agreement is valid.                                                                    11
                     New Supreme Court Decision
                     Calculation of the compensation

                    • The SFSC stated only that the same principles shall apply as for
                      the calculation of the agent compensation and forwarded the
                      case to the Cantonal Court for calculation.

                    • Pursuant to art. 418u para. 2 SCO, the amount shall not exceed
                      the net earnings for one year derived from the contractual
                      relationship, computed on the average of the last 5 years.

                    • However, the economic differences between an agent and a
                      distributor shall be taken into consideration (the agent's net
                      commission earnings can not be compared to the distributor's
                      profit margins).

                    • Will the lower courts apply the principles developed for agency
                      agreements?                                                                       12

                    • Mandatory claim under certain circumstances.

                    • Practical Impact.

                    • Open issue: analogous application to franchise agreements?                                                                  13