A Supreme Court judgment of October 8, 2013 outlines  in more detail on an earlier doctrine regarding when  compensation may be payable to the dealer for the  cancellation of a contract without notice, where that  contract is of indefinite duration and no obligation of  notice has been agreed.

The facts are as follows:

The plaintiff and the defendant had verbally agreed the exclusive  distribution of food for fish and aquariums in northern Spain. The 20- year old contractual relationship was unilaterally terminated by the  manufacturer without notice. The reason for the decision was that  the volume of sales had fallen dramatically since 2004.

The plaintiff claimed that the defendant should be ordered to pay the  costs resulting from the termination as well as compensation for lack  of notice and loss of clientele.

The judgment in the first instance dismissed the claim in full, based  on two reasons: first, compensation for clientele only applies  when it is established that the manufacturer will benefit after the  termination from customers provided by the distributor. This was not  the case. Secondly, compensation for lack of notice is not applied  automatically, because it is necessary to prove damages resulting  from the lack of notice.

The appeal before the Court of Appeal was dismissed on the  same grounds.

The Supreme Court first confirmed that the approach of the judgments  under appeal was consistent with the case law which states that  the absence of notice does not automatically justify the award of  damages. The Court also stated that this doctrine not only affects  compensation for customers but also compensation for lack of notice.

However, according to the judgment, in long lasting exclusive  distribution contracts, the principles of good faith and loyalty require  the party seeking to unilaterally and without cause terminate  the contract to give notice to the other party even when it is not  expressly provided for.

Therefore, the judgment upheld the appeal based on a  misinterpretation of that doctrine, providing a series of guidelines to  determine the implications of a lack of notice. Thus, compensation  for lack of notice is to be calculated with reference to the agency  agreement regulation, which provides for a notice period of one month  per year of duration of the contract, up to a maximum of six months.

In addition, the judgment states that damages resulting from breach  of notice are not reduced only to consequential damages but may  also extend to loss of profits.

The applicant sought a loss of profits for the last six months of the  contract that would have been obtained if the manufacturer would  have been given notice.

The Supreme Court considered that this is a reasonable way to  calculate the compensation for lack of notice, though not the only one.

However, it went on to clarified that the benefit is not simply the  difference between purchases and sales, but that costs incurred by  the distributor to get the product sales (i.e. labor costs, transport,  financial costs, overheads) must also be considered.

Consequently, the judgment states that applying the percentage of  net profit over the past five years over the total amount of sales in  that period is the correct way to calculate net profit.

In conclusion, this judgment not only reiterates the established  doctrine on compensation for lack of notice in distribution contracts  but also goes further, to explain that lack of notice also allows  claiming loss of profits.