The establishment of a commercial network is a recurring challenge for businesses that export and are trying to strengthen their international presence. Small and medium-sized enterprises generally require the support of local businesses in order to effectively enter a new market, like the Spanish market. Distribution is one of the traditional ways of establishing a business relationship with local businesses.
A distribution contract is an agreement according to which a distributor commercialises the good or services of a producer or a supplier. The distributor puts at the supplier’s disposal its commercial network in order to distribute the goods or services of the producer or the supplier for a fixed or for an indeterminate period. The latter may guarantee the distributor the exclusive distribution of the sold goods or services.
The main characteristic of the distribution contract in Spain: the independence of the distributor
The main characteristic of a distributor is the independence and the autonomy it enjoys in relation to the producer or the supplier:
- Differently from an agent who acts on the account of a supplier, a distributor acts in its own name and on its own account;
- A distributor’s activity consists in buying from a supplier a set of products and then in reselling them. As a consequence, the distributor is the one assuming the commercial risk as there are no guarantees of the success of the resell; and
- The gain or profit a distributor obtains is the margin it makes, the difference between the purchase price and the resell price of the goods or services it distributes.
- Hence, distribution requires a double commercial transaction: first, a purchase of goods or services by a distributor (buyer) from a supplier (seller) and afterwards the resale of the goods or services by the distributor (this time acting as seller).
The legal framework surrounding the distribution contract in Spain
The relationship between a supplier/producer and a distributor is not subject to a specific regulation such as the agency agreement, which is governed by Law 12/1992 on Agency Agreements of 27 May 1992. As a consequence, the distribution contract is essentially subject to the freedom of the parties. If one hand the flexibility and the absence of overly restrictive rules are valuable, on the other, the freedom can be tricky for a foreign supplier/producer unaware of the local practices of the distributor’s country.
Therefore, the relationship between a supplier and distributor is essentially based on the terms and conditions laid down in the distribution contract and on their interpretation by Spanish Courts in the event of a dispute.
With regard to this last point, it is important to note that, although distributors are the ones assuming the commercial risks linked to the resale of goods and services, in principle the withdrawal from the contract does not imply per se the loss of clients by the distributor. In certain cases, Spanish Courts recognised the right of a distributor to recover economic damages. This is an extension of the application of Article 28 of the Law on Agency Agreements to the distribution contract.
Jurisprudence highlights that the application by analogy of Article 28 of the Law on Agency Agreements to distribution contracts is not automatic[1] and a distributor has the right to recover economic damages if:
- The supplier’s portfolio has been created exclusively thanks to the effort of the distributor (which must be proven) and not because of the attraction of the supplier´s trademark; and if
- The supplier/producer is able to benefit from the clientele built by the distributor[2].
[1] Judgment No. 523/2016 of TS, First Civil Chamber, July 22, 2016.
[2] Agreement adopted by the Judges of the Supreme Court Chamber on20 December 2005.
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