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Compensation for goodwill in Distribution Agreements

One of the biggest headaches in Spain for small and medium-sized enterprises focusing on exporting is the establishment of a commercial network within those territories and marketplaces where they are interested in entering. One of the most common commercial agreements used for those companies during their international process is the Distribution Agreement, as it is an easy and less expensive solution for setting up the aforementioned commercial network.

Apart from the Antitrust Law -devoted to monitor those behaviors regarding the commercial agreements that could affect free competition within the EU- currently there is not a specific regulation in the law regarding the Distribution Agreement neither international nor here in Spain.
The truth is that the current Spanish Government did developed a specific regulation of this kind of agreements in the proposal of Comercial Code drafted by mid 2013. However, it was a huge surprise that finally, within the draft bill of the Comercial Code approved last May 2014, all the references to the Distribution Agreements had disappeared without justification. There is no indication that the Distribution Agreements will be included again within the final version of the Corporate Code that will probably be definitively approved during this 2015.
This lack of regulation implies that the wording of the terms and conditions of the Distribution Agreement attains greater significance. Likewise, it is also important to turn to the Case Law in order to understand how the courts are solving and construing the claims between the parties involved in the distribution agreement.
Nowadays, in Spain the most contentious matters regarding the Distribution Agreements are referred to resolution of what the economical consequences of its termination are. That is, the right or not to compensation for goodwill in favor of the Distributor when the agreement terminates.
In absence of express provisions within the Agreement regarding the compensation for goodwill, the Spanish Courts will be in charge of considering the specific circumstances of each case in order to decide if the application by analogy of the Spanish Agency Contract Act (L 12/1992, 27 May) (hereinafter referred to as “LCA”) is justified or not.
Although the Case Law is not uniform on this question, it seems that the commonest view for applying the LCA by the Judges is the compliance of the entire following requirements:
1. The Parties expressly have not included a provision within the Agreement stating that the extinction or termination of the Agreement, will not give rise to the right to compensation for goodwill in favor of the Distributor;
2. The creation of the goodwill is due exclusively because of the Distributor effort;
3. The Principal is able to take advantage of the goodwill created by the Distributor (ruling out those scenarios where the costumer is attracted because of the brand of the Principal and not for the Distributor effort);
4. The Distributor evidences the compliance of all the requirements stated in article 28 LCA, provided that the Distributor is not affected by any of the circumstances referred to in article 30 LCA.
Along these lines, the Spanish Supreme Court pronounced the Judgments 547/2013, 2nd October and 569/2013, 8th of October.
Summarizing, it is crucial at the moment of signing the Distribution Agreement, to consider if it is appropriate or not to include a provision within the Agreement regarding the compensation for goodwill.
If it is appropriate or not will depend on what your position is in the relationship, and what is more important, if you are well advised or not.
Written by Angel Pérez
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