Introduction
Supreme Court Decision
Comment
Pursuant to Article 418u of the Code of Obligations, if through its activity an agent has substantially increased the principal's clientele and if, even after termination of the agency relationship, the principal or its successor in title benefits substantially from the business relations with the acquired clientele, the agent has an inalienable right to adequate compensation to the extent that such compensation is equitable.
Until recently, the Supreme Court had refused to apply analogous client compensation in distributorship agreements, stating that, unlike an agent, an exclusive distributor has no obligation to hand over its customers to the supplier upon termination of the distributorship agreement and therefore does not provide the supplier with the future economic benefits linked to the customers. Furthermore, the Supreme Court stated that Article 418u is unique to Swiss legal principles as it obliges a party which has complied with all its obligations to compensate the contracting party for benefits that the other party will realize only after termination of the contract. Therefore, the Supreme Court has been reluctant to expand the scope of application of Article 418u.
In a landmark ruling delivered on May 22 2008(1) the Supreme Court deviated from its previous practice to hold that, under certain circumstances, exclusive distributors have a claim for mandatory compensation upon termination of the distributorship agreement.
The Supreme Court further held that, provided the conditions are met, the distributor's claim for client compensation is mandatory and cannot be waived in the distributorship agreement, even though the claim is based only on analogous application of Article 418u. However, after termination of the distributorship agreement, the distributor has the discretion to waive its claim.
Conditions for compensation
Pursuant to Article 418u, the following three conditions must be fulfilled for an agent to be entitled to client compensation:
- significant expansion of the supplier's customer base;
- substantial benefits for the supplier from the customer base established by the distributor; and
- compensation must not be inequitable.
In its decision the Supreme Court held that an exclusive distributor is also entitled to client compensation if it is in a position comparable to that of an agent. Generally, this is the case if the exclusive distributor is integrated into the supplier's distribution system and its entrepreneurial freedom is limited.
Integration in the supplier's distribution system
Pursuant to the Supreme Court and doctrine, the exclusive distributor is integrated into the supplier's distribution system if the supplier has far-reaching control rights and interferes with the distributor's decision-making process. Examples of such integration may include:
- an obligation to purchase a minimum quantity of products;
- the supplier's right to change the prices and terms of supply unilaterally;
- the supplier's right to stop production and distribution of products arbitrarily;
- the supplier's right to approve new sales offices;
- the obligation for the distributor to have a minimum quantity of products in stock;
- a non-compete clause following termination of the distributorship agreement;
- the obligation for the distributor to spend a minimum amount on marketing activities each year;
- reporting obligations imposed on the distributor, such as submitting sales reports and providing information regarding competitors' activities;
- an obligation to provide an insight into accounting records; and
- an obligation to disclose names and addresses of customers periodically.
Significant expansion of supplier's customer base
An exclusive distributor has a claim for client compensation only if, through its activities, it has significantly expanded the supplier's customer base. This occurs if the distributor has either established a customer base from scratch or increased an existing customer base. The Swiss courts tend to appraise expansion of the customer base by a combination of the growth rate of customers and turnover.
In the decision at hand, prior to the distributor's activities, the supplier had almost no activity in the respective territory. Therefore, there was no doubt that the distributor's activities had significantly increased the supplier's customer base.
Substantial benefits for supplier from customer base established by distributor
Another condition is that the supplier substantially benefits from the customer base expanded by the exclusive distributor. This is the case if the customers remain loyal to the supplier and occurs mostly in the consumer sector.
Compensation must be equitable
An exclusive distributor has no claim for client compensation if it terminates the distributorship agreement or if the distributorship agreement was terminated for a reason for which the distributor was responsible. Furthermore, compensation can be inequitable if the distributor received above-average compensation during the term of the agreement, or if the distributorship lasted for a long term and the distributor has been in a position to benefit from the customer base for a long period of time.
Calculation of compensation
With regard to the calculation of compensation, the Supreme Court stated only that the same principles shall apply as for the agent compensation pursuant to Article 418u. It remanded the case to the lower court for calculation. Pursuant to Article 418u(2), the agent's claim shall not exceed the net earnings for one year derived from the particular relationship, calculated on the average from the last five years. Alternatively, if the relationship has not existed for that period of time, the average of the total across the period is used. It remains to be seen to what extent the lower court will apply the principles developed for agency relationships.
Previously, Swiss law was often applied in distributorship agreements to prevent a mandatory claim for client compensation. In future, such compensation claims will be part of the distributor's compensation, provided that the criteria are met - in particular, that the distributor is sufficiently integrated into the supplier's distribution system.
The Supreme Court's landmark ruling may also have an influence in other areas. For example, if the buyer of a company plans to change the distribution system or intends to integrate the products of the acquired company into its own distribution system, and therefore terminates existing distributorship agreements, the additional costs of a claim for client compensation must be taken into account. This should be adequately addressed in the due diligence process. In addition, the Supreme Court left open whether this reasoning is applicable only to distributorship agreements or whether it also applies to franchise agreements. Considering that generally a franchisee will be even more integrated into the distribution system of a supplier than an exclusive distributor, it is likely that franchisees will also request client compensation in the future.
For further information on this topic please contact Markus Dörig or Philipp Schaller at Badertscher by telephone (+41 1 266 20 66) or by fax (+41 1 266 20 70) or by email ([email protected] or [email protected]). The Badertscher website can be accessed at www.badertscherlegal.ch.
Endnotes