Member Article

The commercial distribution of goods and services developed with the dynamics between sophisticated global markets, where the European Internal Market is integrated, with traditional markets of a local character or national dimension. The type of contract adopted by the producers or importer companies in order for their products or services to reach, through the commercial intermediaries, the final users – consumers or not – i. e. the distribution agreements in abroad sense, varies according to several considerations of an economic nature. For this purpose, the enterprises have many solutions at their disposal: agency agreements, concession, franchising, commission, mediation, commercial mandate, authorized distribution, selective distribution or other atypical contracts aiming that same general function. These contractual figures are typified in the international commercial practice, although they are typified only in the legislation of some countries. Regarding Agency, the EU adopted harmonization rules in order to approximate the most relevant matters of the Member States respective legislation1. 2. Distribution and Agency in Portugal – doctrine definitions and use of analogy by jurisprudence In Portugal, the distribution contract typified in law and more used is the Agency2. The Portuguese doctrine and jurisprudence have been applying on a case to case basis the Agency juridical regime to other distribution agreements, in cases where analogy justifies it, namely concerning the termination of those agreements. In this context, it has been particularly important the goodwill compensation regime, i. e. the compensation earned by the agent in the end of the contract because of the clients gained or developed on the behalf of the principal and that the former will continue to benefit after the end of the contract. The application of this regime to concession or franchising agreements is justified only in case of mixed contracts or contracts where the concessionaire or the franchisee perform functions of clients caption similar to the agent and the concessor or franchisor benefit from those clients after the end of the contract. Return of international contracts to the Portuguese legislation – termination regime In the context of international trade, is particularly relevant the regime of territorial application of law foreseen in the Agency DL.: to the Agency agreements mainly executed in Portugal will apply a legal regime different from the Portuguese one only in cases where the foreign legislation reveals to be more favorable to the agent, being this rule considered to be mandatory and prevailing over forum or arbitration clauses foreseen in the contractual relation. 3. The problem in the competition context – economic management of efficiencies and risks. The definition of juridical and contractual figures instrument to commercial distribution has particular importance in the context o competition law, where the tendency to equalize distribution agreements should be contradicted, namely because Article 81 (1) of the ECT, regarding certain limitations drawing agreements, decisions of associations and concerted practices of a vertical nature, do not apply to genuine Agency agreements3, because of the high level of integration within the principal’s distribution net and the assumption of low levels of economic and financial risk. Article 81 (1) of the ECT will apply to Agency agreements considered to be “not genuine”, as to the other distribution agreements, being applicable the Commission Regulation No. 2790/1999, on the application of Article 81 (3) of the ECT to categories of vertical agreements and concerted practices4. Being so, and in the actual context of self-assessment (after Modernization of May 2004), the choice of one or another type of contract demands from the companies a deeper study of their practical and economic virtues, where it should be included the risk factors related with the prevention, restriction or distortion of competition. 4. Distribution and Agency – main differences and economic ratio for selection While the agent has powers to negotiate and conclude agreements on behalf of the principal (agency with representation), the distributor buys to the supplier to resale on its own expenses and risks. The risks the distributor assumes – and the agent not - are: (i) commercial risks (customers performance; damage caused by products; after Sales services) e (ii) financial (market specific investments, promotion and marketing contributions). The economic reason to choose an agent is usually related with better results (the commission paid to the agent is usually inferior to the distributor margin); a straighter control of the marketing and its budget; the principal keeps direct contact with the clients, when he keeps being a party to the agreements concluded. The choice of an agent tests the capacity of the supplier to penetrate directly the market, also with a straighter control regarding fixing prices and clients’ allocation. On the other hand, the economical reason to choose a distributor is related with the assumption of minor risks by the supplier when expanding to new markets, since that risk is transferred to the distributor who acquires the ownership of the goods he resells. The supplier can obtain advantages out of the management of one single account instead of multiple accounts related with the direct contact with clients. Finally, when assuming the risks of the business the distributor tents to be more motivated to its success. Added to these factors usually are associated tax benefits, because of the higher independence of the distributor. One should note that, in practice, these characteristics can be mingled in order to create a certain level of confusion concerning the agreements nature, being necessary in each case to go beyond the agreement’s name towards its substance and prevailing notes. An agent that assumes contractual risks will fall within the scope of competition law, cases where the possibility to control the agent by the supplier will be considerably less. Article 81 of the ECT usually will not apply to the obligations imposed to agents concerning contracts negotiated or concluded on the principal’s behalf, namely when there is no transfer of ownership to the agent or he does not himself provide the services envisaged5. Finally, the suppliers with market shares around 40% request even more attention, since practices such as, e. g. price discrimination and refusal to supply may easily fall within the scope of Article 82 of the ECT, on abuse of a dominant position. The payment or not of a goodwill indemnity (which can be of a considerable value) in the end of the contract can also become a decisive factor to consider while choosing between the use of an agency agreement or a distribution agreement (if analogy with agency does not apply, as seen above). Problematic clauses used in practice – control and concerted practices vs. costs/benefits evaluation Regarding distribution agreements falling in the scope of Article 81 of the ECT, the clauses more problematic that raise from the practice – that the suppliers should be careful while drawing the contracts – are the non competition clauses (which should be limited to 5 years); obligations to provide information on sensitive commercial data of competitor enterprises; fixing resale prices or minimum resale prices (it can be substituted by fixing maximum resale prices or by recommended resale prices), which should not be confused with the bligation to provide sales’ prices tables6; prohibition of passive sales; disproportional minimum purchases obligations, etc. _____________________________________________________ 1Council Directive No. 86/653/CEE, of 18.12.1986, on the coordination of the laws of the Member States related to self employed commercial agents. 2Decree – Law No. 178/86, of 03.07.86, as amended by Decree – Law No. 118/93, of 13.04.93 (hereinafter “Agency DL.”). 3Commission Notice “Guidelines on Vertical Guidelines”, Para. 12 to 20. 4Applicable according to Article 5 (3) of Law No. 18/2003, of 11.06.03, or the Competition Regime. 5However, and regardless of the fact legal limitations are lesser regarding Agency, certain practical factors may preclude the supplier to perform a broader control of the agent as he could wish, being the agent able to accumulate a considerable bargaining power. 6Article 2 (1) of Decree – Law No. 370/93, of 29.10.93, on individual practices restrictive of commerce, as amended by Decree – Law No. 140/98, of 16.05.98.