The absence of a contract regulating the duration and termination of a distribution relationship does not necessarily entitle a party to abruptly terminate the agreement without facing financial exposure to the other party. In particular, a reasonable notice period should be given to allow the other party to adapt its business operations.
Distribution agreements: Background
Distribution agreements comprise relationships by which the distributor undertakes to market and enhance sales of the supplier’s products.
The distribution agreement sets the framework for the relationship between the supplier and the distributor, in particular the rules for sales performed in execution of the distribution agreement.
By entering into a distribution agreement, the parties typically commit into a long business relationship based on loyalty and mutual cooperation. The distribution agreement involves a series of reciprocal obligations that require on-going performance. With a commercial relationship extending over years, the complexity of the relationship may trigger a series of potential litigious issues between the parties upon termination, particularly if the parties fail to expressly regulate the duration and conditions of termination.
Important to delimit from other agreements
The distributor sells goods of the supplier in its own name and account, and assumes economic risks. Despite a certain economic dependency, the distributor is not a selfemployed agent of supplier but an independent business. This delimitation of a distribution agreement from self-employed agent or other varieties of mandate has a particular importance in case of termination by the supplier (usually seen as the stronger party).
This is because:
- absent a contract, the distributor will try to prove financial claims against the supplier on applicable laws (eg, self-employed agent rules) that protect the weaker party;
- the distributor will claim that the losses suffered from the unilateral termination were amplified due to legal and economic subordination towards the supplier.
Over time, the legal scholars have been reluctant to see a distribution agreement as a form of mandate or agency agreement, thus never admitting that distributors could benefit from the legal regime applicable to them (eg, compensation at termination, mandatory notice periods, etc.).
Distributors may still seek remedies under general civil law. One example would be when termination results from an excessive and unreasonable performance by supplier contrary to the requirement of good faith (ie, abuse of rights), such as an untimely termination of the distribution relationship shortly after the distributor invested in warehouses, a car fleet, marketing, etc. relying on a long-term distribution relationship.
In such case, the civil liability of the defaulting party would be more severe than the contractual liability as the court would consider not only the foreseeable losses at the moment of breach but the effective losses suffered by the distributor.
Romanian law does not provide for a specific duration of the notice period in the absence of a choice by the parties. The scholars, however, inspired by French legal doctrine and jurisprudence, have consistently argued that a reasonable notice period must be given so the other party can adapt its business.
The scholars list these main criteria when asking whether the notice period was reasonable: i) the duration of the relationship; ii) the financial weight of the relationship; iii) professional practices. These criteria are theoretical and their application in practice may lead to a broad range of court decisions, as has been the case in some Western European countries (eg, three months’ notice not enough; fifteen days’ notice enough).
As concerns the law (absent an indication by the parties) regulating the distribution agreement, including its termination, Romania is bound by the Rome I Regulation. The Rome I Regulation provides in article 4 (1) lit. f that a distribution agreement (ie, the frame agreement) is governed by the law applicable at the distributor’s seat.
Parties to a distribution agreement must be seated in EU member states where the Rome I Regulation applies; otherwise, the Romanian courts must apply the national legal framework on conflicts of law (ie, the provisions of Romanian Civil Code on private international law relationships).
With a commercial relationship extending over years, the complexity of the relationship may trigger a series of potential litigious issues between the parties upon termination, particularly if the parties fail to expressly regulate the duration and conditions of termination.