Termination Agreements For Agency And Distribution Contracts

June 2015 Prof. Dr. H. Ercüment Erdem
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Introduction

Execution of a termination agreement is one of the methods to terminate a contractual relationship between the parties. An advantage compared to a unilateral termination declaration by one of the parties is that it ensures that the rights and obligations of the parties arising from, or in connection with, the contract have been satisfied, and regulates the post-contract relationship between the parties, as well.

Parties are free to determine the principles of termination, the effective date of termination, and the contents of the termination agreement, to the extent possible under the applicable law. Content should be determined by taking into consideration the particulars of the main contract and the parties’ intention. Depending on the parties’ intention, the termination date may be set as the signing date of the termination agreement, or a specific date or occasion after the date of signing, as well as a retroactive date.

If both parties have fulfilled their obligations under the contract and are satisfied with the other party’s fulfillment, a settlement clause may be set forth in the termination agreement enabling the release of the parties from their duties and obligations under the contract, subject to the conditions of the applicable law. Applicable law and the dispute resolution venue may be different than that of the main contract.

This newsletter focuses on the characteristics and essential contents of termination agreements that terminate agency and distribution contracts. While setting forth the common principles applicable to both types, it also addresses the differences thereof when necessary.

Usage and Repurchase of Stocks

Within the ordinary course of business, agencies do not hold stocks. With regard to stocks that are held by distributors, it is up to the parties whether they will continue to be used by the distributor or repurchased by the principal. In the event of repurchase, it is important to explicitly specify the conditions of the goods that are subject to repurchase in the termination agreement; i.e. whether or not they are new, in original packaging, etc. Another item that should be agreed upon by the parties is the repurchase price subject to the condition of the goods, provided that the principles for the determination of the repurchase price have not been regulated under the distribution contract.

Cancellation of Data and Confidentiality

During the period of the agency and distribution relationships, it is usual that confidential information and documentation of the principal are shared with the agent or distributor for conduct of the business. Accordingly, the termination agreement should include provisions regulating the usage or cancellation of such information, documents and materials, and the data and documents that are in the possession of the receiver should be either cancelled or returned to its owner. The parties may agree to determine the confidentiality period following the termination, provided that such confidentiality obligation is not restricted under the applicable competition rules. It is stated under the Turkish Competition Authority’s Guidelines on Vertical Agreements[1] that the usage and disclosure of the non-public know-how may be restricted for an indefinite period of time. EU Commission Regulation No. 330/2010[2] (“Regulation”) also contains a parallel provision that allows the possibility to impose a restriction that is unlimited in timeframe on the use and disclosure of know-how which has not entered the public domain.

Non-Competition Obligation

It is possible to regulate a post-termination non-competition obligation under the termination agreement. Such an obligation is customary for agency relationships. It is important to explicitly define the scope of the territory, products or services and duration, subject to the non-competition obligation. The non-competition period cannot exceed a period of one year for the distributor, and two years for the agent.

Under Turkish law, Art. 123 of the Turkish Commercial Code (“TCC”)[3] governing the agency relationship sets forth that post termination non-compete obligation may be agreed by the parties provided that a suitable amount of compensation is paid to the agent. The non-competition agreement must be made in writing, and a written document that bears the provisions of the agreement and that is signed by the principal should be delivered to the agent. Such agreement can be only made for a maximum period of two years as of the date of termination and should be limited to the geographical area or the group of customers entrusted to the agent and to the kind of goods covered by the agency contract. Council Directive 86/653/EEC[4] (“Directive”) also includes similar provisions except for the payment of suitable compensation to the agent but allows national laws to impose other restrictions.

As to distribution relationships, post-termination non-competition obligations are permitted neither as per the Regulation, nor the Block Exemption Communiqué on Vertical Agreements of Turkish Competition Authority No. 2002/2[5]. However, both legislations set forth that a non-competition obligation may be imposed on the distributor for a maximum period of one year provided that the prohibition (i) relates to goods and services that are in competition with the goods or services which are the subject of the contract, (ii) is limited to the facility or land where the distributor operated during the term of the contract, and (iii) is compulsory for the protection of the know-how transferred by the principal to the distributor.

Transfer of Customers

On the subject of the transfer of customers, agents and distributors are subject to different regimes. Upon termination of the agency contract for any reason, the agent is required to transfer its customers within the subject territory to the principal and to co-operate and assist the principal for the conduct of smooth and efficient transitioning.

On the other hand, since the distributors act in their own name and on their own behalf, it is unusual that they return their customers to the principal. Notwithstanding this, there is no restriction for the regulation of a transfer of a customer clause under the termination agreement, and such an obligation can be regulated as a part of the non-competition clause, as well.

In any event, both the agents and distributors must halt all sales, offers for sale, advertising and/or promotion of the products, and must no longer represent the principal within the subject territory.

Post-Termination Commission

As per the Directive, agents are entitled to request commission for transactions that are concluded after termination, provided that (i) the transaction is mainly attributable to the agent’s efforts during the period covered by the agency contract, and the transaction was entered into within a reasonable period after the contract terminated; or (ii) the order of the third party in relation to a transaction that would normally entitle the agent to commission during the term of the contract reached by the principal or the agent prior to the termination of the contract. Art. 113/3 of the TCC also follows these same conditions.

Notice Periods

A contract is deemed to be indefinite if it does not provide any specific term, or if both parties continue to perform the fixed-period contract after the expiry of its term. The Directive determines minimum notice periods for the termination of indefinite term contracts depending on the timing of the notice; i.e. one month for the first year of the contract, two months for the second year, and three months for the third year and subsequent years. The parties are not allowed to agree on shorter notice periods.

National laws of the member states may fix longer notice periods; i.e. four months for the fourth year of the contract, five months for the fifth year, and six months for the sixth and subsequent years, and may decide that the parties may not agree to shorter periods. Turkish law fixes the notice period as three months.

Considering the freedom to set longer notice periods, setting of the same may be an essential content of the termination agreements. If longer periods are provided in the agreement, it is important to know that the notice period to be observed by the principal cannot be shorter than the one to be observed by the agent, and any attempted waiver of this right will be void.

Indemnity and Compensation

The Directive offers choices to the member states to include in their local legislations (goodwill) indemnity or compensation. Parties are not allowed to derogate from the provisions on indemnity and compensation that are to the detriment of the agent prior to the expiry of the agency contract. The agent loses his entitlement to indemnity or to compensation if he does not notify the principal that he intends to pursue his entitlement within one year following the termination of the contract.

No indemnity or compensation is payable to the agent in cases where (i) the immediate termination by the principal is justified by the agent’s default; (ii) the agent has terminated the contract, unless such termination is justified by circumstances attributable to the principal, or on the grounds of age, infirmity or illness of the agent, the consequence of which he cannot reasonably be required to continue his activities; or (iii) the agent assigns his rights and duties under the contract to another person.

Compensation

In the event of termination, if, in particular, the agent is deprived of the commission that he would normally be entitled to while the principal derives benefits that accrue in connection with the agent’s activities, or has been unable to amortize the costs and expenses he had incurred for the performance of the contract on the principal’s advice, then such agent would be entitled to compensation for the damages suffered.

Indemnity

As per the Directive, goodwill indemnity may be requested by the agent on the condition that (i) the agent has brought new customers, or has significantly increased the volume of business with existing customers, and the principal continues to derive substantial benefits from the business with such customers, and (ii) the payment of this indemnity is equitable, having regard to all of the circumstances and, in particular, the commission lost by the agent on the business transacted with such customers.

Under Turkish law, conditions for agents’ entitlement to goodwill indemnity are similar to the provisions of the Directive. In addition, the last paragraph of Art. 122 of the TCC sets forth that the relevant provisions are also applicable to the termination of exclusive distribution agreements and other similar continuous agreement relationships that grant an exclusive right, provided that it is not in breach of the fairness principle.

Conclusion

Termination agreements usually include provisions that regulate non-competition, confidentiality, goodwill indemnity, stocks, terms, and notices, which are essential in terms of agency and distribution contracts. In conformity with the freedom of contract, provisions may be extended so as to cover certain other matters depending on the nature of the main contract and the intention of the parties. Rules of the laws that are applicable to the termination agreement must certainly be taken into consideration as they vary between countries.



[1] Guideline on Vertical Agreements was published on June 3, 2009. The provision regarding confidential information is in Paragraph 40 of the Guideline. To find the English version of this Guideline see: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fGuide%2fDikey+Anla%C5%9Fmalara+%C4%B0li%C5%9Fkin+K%C4%B1lavuz.pdf (accessed on: 09.07.2015).


[2] EU Commission Regulation No. 330/2010 on the Application of Article 101(3) of the Treaty on the Functioning of the European Union to Categories of Vertical Agreements and Concerted Practices was published on April 23, 2010. The provision regarding the confidentiality of know-how is in Article 5/3 of the Regulation. To find the English version of this Regulation see: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32010R0330&from=EN (accessed on: 09.07.2015).


[3] Turkish Commercial Code no. 6012 was published in the Official Gazette dated February 14, 2011 and numbered 27846, and entered into force on July 1, 2012.


[4] Council Directive 86/653/EEC on the Coordination of the Laws of the Member States relating to Self-employed Commercial Agents was published on December 31, 1986. The provision regarding post-termination non-competition obligation of agents is in Article 20 of the Directive. To find the English version of this Directive see: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:31986L0653&from=EN (accessed on: 09.07.2015).


[5] Block Exemption Communiqué on Vertical Agreements no. 2002/2 was published on July 14, 2002 and entered into force on the same date. The provision regarding post-termination non-competition obligation of distributors is in Article 5(b) of the Communiqué. To find this Communiqué see: http://www.rekabet.gov.tr/File/?path=ROOT%2f1%2fDocuments%2fTebli%25c4%259f%2fteblig35.pdf (accessed on: 09.07.2015).


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