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.