DISTRIBUTION LAW IN BELGIUM

March 1st, 2013 § 0 comments

Introduction:

Belgium is one of the few jurisdictions in the world with specific legislation on the termination of exclusive and quasi-exclusive  distribution agreements. Any company considering to distribute its products on the Belgian market – which after all is commercially an interesting market – is strongly advised to take specialist advice on Belgian distribution law, since Belgian law grants considerable protection to the distributor in case of termination. The Act of 19 December 2005 on precontractual information to be provided before entering into commercial cooperation agreements which may also be applicable to distribution agreements is not discussed here.  Competition law aspects under EU or national law are not discussed either in this contribution.

The 1961 Act on unilateral termination of exclusive and quasi-unilateral distribution agreements concluded for an indefinite term.

Definition of an distribution agreement under the 1961 Act.

A distribution is a framework agreement by which a manufacturer reserves to the distributor the right to sell specific products in a specific territory. The relation between the principal should be more than just a series of individual purchase agreements. A written agreement is not required.

Distribution agreements covered by the 1961 Act:

  • Exclusive distribution agreements (e.g. territory or specific category of customers);
  • Quasi-exclusive distribution agreemenst (nearly all the products or nearly all the territory). Shared exclusivity between 2 or more distributors is possible;
  • Distribution agreements, which are not exclusive nor quasi-exclusive, whereby the principal imposes important obligations on the distributor (e.g. minimum targets, minimum stock, publicity, investements etc.);

The 1961 also gives rules for distribution agreements for definite term!

Agreements for a definite term will not automaticall terminate at the end date, but should always be terminated by giving a notice of termination by registered mail not earlier than 6 months and not later than 2 months  before the end date. If no such notice or an irregular notice is given, the agreement will be extended for an indefinite term or, if the agreement provides for a an extension for a definite term, for a definite term.

Furthermore the agreement always will become an agreement for an undefinite term as from the 3rd extension.

Agreements for an undefinite term.

The Act only deals with termination of distribution agreements as defined in the Act which are concluded  for an undefinite or which have become agreements for an definite term by operation of the law (as from the 3rd extension).

Reasonable notice period in case of termination except in case of termination for serious cause.

A party wishing to terminate a distribution agreement under the Act has to observe a reasonable notice period except in the event of a serious cause. The fact that a distributor fall considerable short of not realizing certain minimum sales targets, may be construed under the agreement as a serious cause, justifying termination without a notice period.

Should the principal terminate the agreement without a reasonable notice period or should he give an irregular notice ( not by registered mail),  the termination will nevertheless result in termination, but makes the principal liable to damages. The compensation for damages will be calculated on the length of the notice period which should have been obeserved “in lieu of notice”).

Criteria reasonable notice period:

  • Duration of the distribution agreement;
  • Percentage of turnover relevant products of the total turnover distributor;
  • Average turnover during last 2/3 years before termination;
  • Reputation products;
  • Recent case law: period reasably be required by the distributor to reorgaize his activities in order to find alternative sources of income;

The length of a reasonable notice period will be determined by the Court. The length may range from 6 – 48 months.

Calculation damages:

Roughly 2 methods:

Method 1: Semi-gross profits(turnover products minus purchase price) minus non-fixed costs (e.g. transport costs) related to the sale of the products.

Method 2: Semi-net profits (margin before taxes) to be increased with fixed costs (e.g. costs of labour, rent, water, electricity, writing off on investments).

Additional compensation:

If conditions fullfilled the distributor is entitled to additional compensation for:

  • Development customers or considerable increase volume of business with already existing customers, from which the principle will continue to benefit. (case law: 1-2 years gross/net profits);
  • Costs of termination of employment agreements;
  • Amount of investments or publicity;
  • Return of non obsolete stock;

Jurisdiction

Under European law a distribution agreement is considered as a services agreement.

EU-Regulation 44/2001 (« EEX ») on Jurisdiction, recognition and enforcement:

  • Forum clause (art. 23 EEX);
  • Court of domicile of defendant art. 2 EEX);
  • Alternative jurisdiction: place of performance of services: place where products are distributed (art. 5 § 1 (b EEX);

A Belgian Court will accept jurisdiction on the basis of art. 5 § 1 (b) EEX, unless the agreement provides for a forum clause (e.g. German Courts).

Applicable law:

Forum contractus: if no choice of law is made in the agreement the law of the habitual residence of the service provider (i.e. the distributor) will be applicable  (art. 3 Rome II (Reg. 593/2008) on contractual obligations).

However the Belgian Courts will ignore a choice of law clause (art. 4 Rome I), which refers to a foreign law in relation to agreements which affect the Belgian market, since the Belgian Act is imperative (mandatory character).

Therefore should one prefer to apply a foreign law instead of Belgian law to a distribution agreement which covers Belgium or part thereof, a mere choice of law clause will not suffice, since a Belgian Court will in any case apply teh Belgian 1961 Act. In order to be able to enforce the choice in favor of a foreign law, the agreement should also contain a jurisdiction clause referring to the exclusive jurisdiction of a foreign Court (art. 23 EEX).

Finally, a clause which refers to Belgian law as the law applicable to a distribution agreement which does not affect the Belgian market, will not result in the application by the Belgian Courts of the 1961 Act, but only in the application of general Belgian contract law ( so called “auto limitative character » of the 1961 Act). If the parties wish to apply the 1961 Act to a distribution agreement which does not affect the Belgian market they have to refer specifically to the 1961 Act.

Pay particular attention to arbitration clauses! They may be held unenforceable under Belgian distribution law.

Belgian Courts will accept jurisdiction by declaring arbitration clauses in distribution agreements affecting the Belgian territory unenforceable, if arbitrators are likely not to apply the 1961 Act on claims by the distributor in relation to the termination of such agreements.

 

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