Mind Your Belgian Distributor! FAQ on the Belgian Law of 27 July 1961 on the Unilateral Termination of Exclusive Distribution Agreements of Indefinite Duration.

Belgium is one of the very few countries in the world with a specific legal regime for the termination of certain distribution agreements, in addition to a law on agency contracts. In other countries, the Belgian Law of 27 July 1961 on the unilateral termination of exclusive distribution agreements of indefinite duration (“the Law”), which is – in contrast to legislation on agency contracts – not harmonised at a European level, often gives rise to surprise, disbelief and specific questions. Below I have listed the most frequently-asked questions with my general, summarised answers.

I    General

Q1.    Why was the Law passed?
In the circumstances of the post-Second World War economic recovery, the Belgian parliament believed that distributors, often seen as the weaker party in distribution agreements with major foreign manufacturers, required special protection against the unwanted termination of distribution agreements.

Q2.    What are the Law’s main provisions?
First, the Law provides that distribution agreements to which it applies, in the absence of a serious breach, may only be terminated by giving reasonable notice or by paying compensation in lieu of notice (see Section III below).
Second, the Law provides that, provided certain conditions exist, distributors are entitled to claim additional compensation from manufacturers, irrespective of whether or not reasonable notice was given.  This additional compensation is to cover (i) goodwill, (ii) costs and investments incurred by the distributor and (iii) distributor staff redundancy costs (see Section IV below).

Q3.    Is the Law a jackpot for distributors?
Foreign manufacturers often view the Law as too generous towards distributors, especially when confronted with the significant claims made by distributors before the Belgian courts.  Even though distributors tend to claim more than the courts award, the compensation due under the Law is often very substantial.

However, we should not lose sight of the fact that, when passing the Law, the Belgian parliament was aiming to legally “lock in” the protection of the distributor, while not intending to detract from the manufacturer’s legitimate interests.


II.    Scope of the Law

Q4.    Does the law apply to any distributorship?
The Law defines a distributorship as an agreement under which a principal grants one or more distributors the right to sell, in their own name and for their own account, products manufactured or distributed by the principal.
For the Law to apply, the distribution rights should be (i) exclusive, (ii) for a territory including (part of) Belgium and (iii) for an indefinite duration.

It should be noted that, following an amendment to the Law made in 1971, all fixed-term distribution agreements are, as from their third renewal, considered to have become agreements of indefinite duration.

Q5.    Is the law’s scope limited to expressly exclusive distributorships?
Definitely not.  Whether or not distribution rights will be held to be exclusive depends on the de facto situation, rather than on the wording of the distribution agreement.  If a distributor is responsible for almost all the sales of the manufacturer’s products in the territory (so-called “quasi-exclusivity”), the Law will apply to the distribution agreement, even if it contains a non-exclusivity clause. 

Furthermore, the Law applies to contracts where the principal imposes major obligations on the distributor, which by their nature could cause considerable prejudice to the distributor if the agreement were to be terminated.


III.    Reasonable notice

Q6.    What is reasonable notice?
The Law does not define “reasonable” notice.  However, case law has established that the notice period must be long enough for the distributor to find an alternative distributorship offering the same commercial advantages as the former one, or more generally, to allow the distributor to find an alternative source of income, whether or not this involves a reorganisation. 

Q7.    How is reasonable notice determined?
The notice period should be agreed between the parties upon termination.  If the parties fail to reach an agreement, the court will define a “reasonable” notice period.  Except for the principle of equity, the Law does not provide any guidelines in this respect.  Generally, the courts take into account the following criteria:

• the length of time the distributorship has existed;
• the size of the investments made by the distributor
• the amount of the distributor’s turnover generated by the contract products as part of the distributor’s overall sales;
• market share and sales growth during the distributorship;
• the rarity and specificity of the products;
• the existence of other distributorships for the same product;
• the extent of the territory allocated to the distributor.

In practice, reasonable notice tends to be between 3 months and 3 years, depending on the specific circumstances of the case and on the weight given by the court to each of the above criteria.

Q8.    What if no notice or insufficient notice is given?
Firstly, it should be noted that the party terminating the distribution agreement is not obliged to give notice.  It  may choose instead to pay compensation in lieu of notice.

In any event, if no notice, or insufficient notice, is given, the terminated party is entitled to compensation in lieu of notice under Article 2 of the Law. 

There is no formula or rule for calculating the amount of the compensation in lieu of notice.  It is generally calculated on the basis of the semi-gross profit (i.e. the net profits which would normally have been made by the distributor during the reasonable notice period, plus the amount of fixed overheads incurred during the notice period. Fixed overheads include rent, heating, lighting, maintenance of premises and equipment and insurance).  The reference period taken into account is usually limited to a maximum of three years preceding the termination date.
In most cases, the courts will appoint an expert to make the calculations.


IV.    Additional compensation

Q9.    What is covered by additional compensation?
Additional compensation covers (i) goodwill (ii) costs incurred and investments made by the distributor and (iii) redundancy costs for the distributor for staff dismissed as a result of the termination.  No other heads of claim can be introduced.

Q10.    Is additional compensation due in the event of lawful termination?
Additional compensation will be due if certain conditions apply, irrespective of whether or not reasonable notice was given. No additional compensation is due if the distribution agreement is terminated on the basis of a serious breach by the distributor.

Q11.    How is the entitlement to additional compensation assessed?

In order to be entitled to additional compensation, the distributor has to demonstrate that

1.  in respect of goodwill:

• there had been a significant increase in the number of customers during the term of the distribution agreement; AND
• this increase was a result of its marketing efforts; AND
• the customers are likely to continue to purchase the contract products after termination;

2. in respect of costs and investments incurred:

• he made investments or incurred costs that will continue to benefit the principal after termination;

and/or

3. in respect of redundancy costs:

• he had to dismiss members of staff as a direct result of the termination of the distributorship.

In most cases the only parameter to generate significant compensation is goodwill.

Q12.    How is the additional compensation calculated?
The courts set the amount of additional compensation in equity.  In the absence of a  formula, this is usually fixed at between six months’ and two years’ net profits, between three months’ and one year’s semi-gross profit (see Q8.) or gross profit, or alternatively, a percentage of average sales (e.g. 10%).


V.    Other issues

Q13.    Does the supplier have to take back the remaining stock?
Even though the Law does not expressly specify an obligation for the principal to take back the remaining stock at the end of the distributorship, case law considers this to be a duty of the principal.  Nevertheless, the parties may agree otherwise in the distribution agreement.

VI.    Issues to be taken into account when drafting a distribution agreement

Q14.    How to avoid the Law?
The simplest way to ensure that a distribution agreement does not fall within the scope of the Law is to make it non-exclusive or for a fixed term.  However, such contractual provisions may not suffice to avoid the Law, since it also applies to “quasi-exclusive” distributorships (see Q5) and from the third renewal of fixed-term agreements (see Q4).
Another way to avoid the scope of the Law would be for the parties to agree to submit disputes to non-Belgian courts or arbitration, and to agree that a foreign law applies. However, it should be noted that such provisions are not always watertight in the light of Article 7.1 of the Rome Convention of 19 June 1980 on the law applicable to contractual obligations (or Article 9.3 of EU Regulation 593/2008 of 17 June 2008 on the law applicable to contractual obligations (“Rome I”). 

Q15.    Can the parties agree on the consequences of the termination of their agreement?
The Law only allows the parties to agree on the consequences of the termination once the contract is actually terminated. Therefore, any waiver of rights under the Law is invalid and unenforceable, unless given after the actual termination. 

Q16.    Are there any formal requirements to be taken into account when entering into a distribution agreement?
Neither the general principles of Belgian contract law nor the Law specify any formal requirements for entering into a distribution agreement. It is, of course, advisable to have a written agreement rather than a verbal one.
However, the Belgian Law of 19 December 2005 on pre-contractual information in the context of commercial co-operation contracts specifies a specific and formal duty of information and a “stand-still” period before the co-operation agreement is signed. This law may apply to distribution agreements to the extent that the distributor is given the right to use a specific commercial formula when selling the products (i.e. a common sign board or trade name or the transfer of know-how or commercial or technical assistance) and if the distributor has to pay (direct or indirect) compensation of any kind in this respect.