Compensation in Distribution Contracts: a snapshot of Portuguese Law

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Paris | New York | Lisbon

I. Background

The right to compensation in the event of termination may arise in multiple legal contexts. The contracts where this issue arises the most are the distribution contracts (agency, franchise and the like).

In Portugal, distribution contracts do not follow a specific legal framework. However, there is a specific legal regime applying to agency contracts, enacted by Decree-Law no. 178/86, of July 3, 1986 and later amended by Decree-Law no. 118/93, of July 3, 1993). This legal regime may also be applicable by analogy to other (if) similar distribution contractual relationships (e.g., franchise or concession contracts). In such cases, one must take into account, among others, the type of business model in question and also the obligations arising from the contract to both parties.

II. Rights to compensation

According to the agency legal regime, there are two different compensations to consider in case of termination: (i) a compensation, in general terms, for damages resulting from the other party’s default or breach and (ii) a so called “goodwill compensation”. Consequently, the agent (or other type of distributor, depending on the case) is entitled to a general compensation when it has suffered damages resulting from the breach or violation of the contract by the other principal. In specific cases, this compensation shall be calculated according to equity.

The agent may also be entitled to a “goodwill compensation”, provided that the following cumulative criteria are met: (i) the agent has brought new customers to the principal or increased substantially the volume of business of the latter with existing clients; (ii) the principal will benefit considerably after the termination of the contract due to the agent‘s activity; and (iii) the agent ceases to receive any remuneration for the contracts negotiated or concluded, after termination of the contract, with the customers referred in the first criterion. Such compensation is determined in accordance with equity, but cannot exceed a value equivalent to an annuity, calculated out of the average annual remuneration received by the agent during the previous five-year period.

The question that follows is whether this “goodwill compensation” also applies in case of termination of other types of distribution contracts, by virtue of analogy. The answer is not clear as it will depend on a case-by-case assessment. However, as a general rule, we now have the guidance from the Portuguese Supreme Court of Justice. Indeed, the Portuguese Supreme Court of Justice affirmed that the criterion above mentioned in (iii) should also be considered for the purposes of awarding a “goodwill compensation” in the context of concession contracts (Judgement no. 6/2019, of 4 November 2019). In other words, when applying such regime to other types of distribution contracts in case of termination, all the criteria set forth in the agency legal framework must also be met.

Accordingly, other types of distributor may be accorded with the “goodwill compensation” in case of termination. This holds a very important consequence: indeed, according to the Portuguese law on the agency contract, the goodwill compensation is not subject to any waiver, that is, it is mandatory. This means that any distributor may not waive its right to goodwill compensation.

III. Final notes

Several other legal and contractual details exist, notably when the reality of each business differs and parties agree on clauses to better suit their contractual relationship. This is why the application of the agency legal regime to other types of contracts should be considered cautiously and on case-by-case basis.

The Portuguese team of Victoria Associates has successfully represented clients in disputes related to termination of distribution contracts and welcomes any question that may arise in this context (info@victoria.associates).

Victoria Associates

Team:

Duarte G Henriques

João Nuno Frazão

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Copyright Victoria Associates 2019