Distribution Agreements in the Holanda

General

Distribution agreements are, from a civil law point of view, not specifically regulated under Dutch law. Instead, the general laws of contract apply along with case law from Dutch court decisions. Book 6 Dutch Civil Code (DCC) sets out the requirements relating to the formation of contracts. These provisions must be read in conjunction with the more general rules regarding juridical acts, that is, acts intended to invoke legal consequences provided in Book 3 DCC.

There is a general legal obligation on parties to deal with each other in good faith. Under Dutch laws, general civil law is governed by the principle of reasonableness and fairness. The principle of reasonableness and fairness may not only supplement the existing contract and relationship (based on article 6:248(1) DCC), but may also derogate from the contract that the parties agreed upon at an earlier stage if a provision is, in the given circumstances according to the principle of reasonableness and fairness, unacceptable (based on article 6:248(2) DCC). A high standard is applied to derogate from an agreed provision in a contract. That said, (very) large suppliers should be aware that a very one-sided provision in an existing contract (for example, a provision that the distribution relationship may be terminated by the supplier at any given moment, respecting a notice term of only 30 days), with (very) small distributors could be set aside under the principle of reasonableness and fairness, if such provision is deemed unacceptable in the given circumstances. It is not possible to predict what kind of provisions may be set aside, if any, since the court will consider all relevant circumstances, including the financial power of each party, the dependency of the parties on each other, the duration of the contract, the investments made by either party, what each party could reasonably expect from the other party, and any other relevant circumstances that exist. As a general rule, Dutch courts have the tendency to protect a ‘weaker’ (smaller) party at the expense of a financially stronger (larger) party.

Competition laws

When dealing with distribution agreements – and other vertical agreements – competition laws, and more particularly, the Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the applicability of article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, are applicable.

EU Commission Regulation 330/2010 and the EC Guidelines thereto provide the relevant framework for the assessment under competition law of all vertical agreements that affect trade between the member states. The Regulation, inter alia, prohibits resale price fixing as well as imposing certain restrictions on the territory or group of customers that can be served. It is prohibited to restrict ‘passive sales’ by a distributor, which includes sales via the internet. The Regulation also restricts the duration of a contract that contains a non-compete clause. With respect to purely domestic distribution agreements, the Regulation equally applies by virtue of article 13a of the Dutch Competition Act. There are no additional Dutch competition laws relating to distribution agreements.

The Netherlands Authority for Consumers and Markets (ACM) is charged with competition oversight, sector-specific regulation of several sectors, and the enforcement of consumer protection laws. The ultimate goal of the ACM is to create a level playing field, where all businesses play by the rules, and where consumers exercise their rights.

For the ACM, fines are an important way to sanction violators. Fines can be as high as €450,000 or 10 per cent of the relevant turnover. However, ACM has many other instruments at its disposal, including:

• orders subject to periodic penalty payments. In order to end violations, the ACM has the ability to impose orders subject to periodic penalty payments on companies. A company is given a deadline before which it must have adjusted its practices. If the company fails to do so, it will have to pay the penalty payments until it has made the necessary adjustments.
• binding instructions. If a company violates a statutory provision, the ACM has the option of giving it a binding instruction. Through the instruction, the ACM explains how the law should be interpreted in practice.
• commitments. Companies can make commitments to ACM, promising to adjust their practices in order to avoid further enforcement actions.
• education. Education is an important instrument to make sure that businesses and other organisations comply with the rules. That is why the ACM publishes its decisions, vision documents, and interpretations of the rules on its website. The ACM additionally published studies and advisory papers such as market scans and informal opinions.

The powers of the ACM have been laid down in laws and regulations. These rules determine what the ACM can and cannot do. In several procedures and policy rules, the ACM has clarified how it exercises its powers in practice.

Many investigations launched by the ACM have been prompted by solid leads (tip-offs). These tip-offs may have been submitted by businesses or to ConsuWijzer, or by anonymous informers. ACM officials have the authority to enter premises, request information, demand access to documents, and obtain data. These powers can be exercised at business premises as well as in homes. Furthermore, everyone is required to cooperate with ACM investigations. If the ACM comes across correspondence between lawyers and their clients, the ACM shall leave such correspondence outside the scope of the investigation (legal professional privilege). This applies to any correspondence found at a law firm as well as at the company under investigation.

Several types of distributors

There are many different types of “distribution” relationships. For the purpose of this report, we will assume that a distribution agreement will be the classical reseller agreement, as contained hereunder as the first type of distribution relationship:

Distributors (classical distribution agreement)

Distribution agreements are agreements (or relationships) whereby the supplier provides its distributors the right (and also obliges them) to resell and distribute the relevant products or services in its own name, and on its own account.

Franchising

Franchise agreements are agreements (or relationships) whereby the franchisor provides its franchisees with the right (and also obliges them) to operate a business following the business concept of the franchisor. In the course of the contract’s duration, the franchisee has the right and duty to make use of the franchisor’s brand name, know-how, technical and business methods, method of working, and other matters that fall under the industrial and intellectual property of the franchisor. The franchisor provides support to the franchisee in the form of continued commercial and technical support. An agreement for distribution / resale of products or services may be part of a franchise agreement.

The Dutch Franchise Act has recently been adopted, and will most likely come into effect on 1 January, 2021 (the Franchise Act). The Franchise Act protects franchisees operating in the Netherlands. It has been argued that the Franchise Act should also apply to selective and exclusive distribution agreements. As the Franchise Act still needs to come into effect, it is unclear as to what approach the courts will take, but it is certainly something to pay attention to while concluding a distribution agreement under Dutch law or with a Dutch distributor, especially when such distribution agreement bears some elements of or resemblance to franchise.

Commercial agents

Commercial agency agreements are agreements (or relationships) whereby the principal entrusts the commercial agent, for a remuneration, to act as an intermediary in the realisation of contracts, and possibly to conclude such contracts in the name and on account of the principal, without being subordinate to the latter. The agency protection has a reputation, as the agent may be entitled to a goodwill compensation upon termination. In some neighbouring countries – we understand this is the case in Belgium, France, Germany, and Switzerland – the agency rules regarding goodwill are analogously implemented to distribution agreements. So far, this approach has not been adopted by Dutch courts.

Use of (employed) sales representatives

Employment agreements are agreements whereby the sales representative is working, in general for a monthly salary, according to specific instructions, and in the name and for the account of the employer.

Right to sell under a private label

A supplier may also provide a third party the right to resell and distribute its products or services under the third parties’ private label. Such sales are on the third parties’ own account and in their own name.

Trademark licensing

Trademark agreements are agreements whereby the licensor grants the licensee the right (and may also oblige it) to use the relevant trademark for certain products or services in a certain territory. The licence can be granted on a pending application or a registered trademark right, and can be for a limited period of time or perpetual, exclusive or non-exclusive, limited in scope (for certain use only), for free or for consideration. A trademark licensing agreement can be (very) similar to a franchise agreement.

Joint venture

A supplier may also work closely with a local distributor in a contractual business undertaking (without any partnership or incorporation) such as a joint venture or set up a business entity with the local distributor.

No formal or registration requirements

There are no specific restrictions on provisions in distribution contracts, or limitations on their enforceability. However, the principles of reasonableness and fairness play an important role in Dutch contract law. See also question #1.

Distribution agreements may be laid down in writing, but are often based on an oral agreement. In the absence of an agreement in writing, it can be difficult to assess each party’s rights and obligations. There are no mandatory requirements to have an agreement in writing, or in a certain language.

There are no industry-regulatory constraints for distributors in general, and there are no specific government agencies that regulate the relationship between a supplier and its distributor. There is also no obligation or possibility to register the distribution relationship.

Exclusivity

In general, exclusivity is a matter to be agreed upon by the parties involved, and it is always advisable to be specific and clear on this subject. This is especially important because exclusivity (or the lack thereof) often leads to discussions (and sometimes disputes) in distribution relationships. Exclusivity is often tied in with specific sales targets that need to be realised.

If exclusivity has not been explicitly granted in a written contract, it cannot be ruled out that a court may still be of the opinion that a distributor has been granted exclusivity if the parties’ conduct is such. For example, if a supplier has been conducting business with only one particular distributor in a certain territory for many years, a Dutch court may be of the opinion that it was the intention of both parties to conduct business on an exclusive basis.

When the distributor has been granted exclusivity, a violation of such exclusivity will generally be seen as a material breach, and may entitle the distributor to payment of damages and/or to terminate the distribution agreement for cause.

Contractual provisions of an important nature

The following provisions are of particular importance when concluding a distribution agreement (this is a selection based on experience, however every distribution relationship is unique, and has its own specific characteristics and requirements):

• non-compete obligations – any obligation needs to comply with competition laws (also see #1.2);
• whether the distributor will be granted exclusivity – needs to be specified clearly to avoid future disputes (also see #2.2);
• return, repair, warranty, or recall of products – which party is responsible for what? It is advisable to specify this in the agreement.
• resale prices – any obligation or recommendation needs to comply with the applicable competition laws (also see #1.2);
• term and termination – how easy or difficult is it to terminate the agreement, and what are the notice periods that need to be respected?
• upon termination – whether there is an obligation to buy back stock and if so, at what price; and
• dispute resolution clause – important, especially in an international context.

Restrictions regarding the territory or group of customers Within the Netherlands (and the EU), practices that restrict trade are prohibited. The EU Commission Regulation 330/2010, inter alia, prohibits the imposition of certain restrictions regarding the territory or group of customers that can be served. A supplier may restrict the geographic areas or categories of customers to which a distributor resells, and it may also reserve certain customers to itself. Exclusive territories and customers are permitted, provided that ‘passive sales’, including internet sales, may not be restricted. Passive sales are sales where a distributor responds to unsolicited requests about the products from individual customers. A supplier may, however, prohibit its distributors from actively approaching customers outside its exclusive territory by targeted marketing (For eg. by sending direct emails, visits, or by advertisements on its website specifically targeted at a group customers outside its territory) (“active sales”).

Following Dutch and European competition rules, it is not permitted to impose any direct or indirect non-competition obligations on the distributor (such as restrictions on the distribution of competing products), if the duration of these obligations exceeds five years. Non-competition obligations that are tacitly renewable for a period of five years or more are considered to be concluded for an indefinite period, and are thus also not permitted.

Non-compete arrangements are arrangements that result in the buyer purchasing from the supplier (or a designated third party) more than 80 per cent of the buyer’s total purchases of the contract goods and services. However, this five-year limitation does not apply when the goods or services are resold by the buyer from premises and land owned by the supplier, or leased by the supplier from third parties not connected with the buyer.

Following Dutch and European competition laws, it is not always permissible to impose non-competition obligations on the distributor after the distribution agreement has been terminated. Such non-compete obligation is only allowed when it is deemed indispensable to protect the know-how transferred by the supplier to the buyer, and is limited to the point of sale from which the buyer has operated during the contract period, and is limited to a maximum period of one year.

Sales via internet

Dutch and European competition law state that a distributor should be free to sell products via the internet. The use of internet is not considered to be an active form of sales. Therefore, within certain boundaries, the distributor is free to sell through the internet.

A situation in which a distributor is contacted by a customer, via the website of the company, is considered to be a passive form of sales since it is a result of the technology of the internet.

The Guidelines to the EU Commission Regulation 330/2010 stipulate that, in principle, every distributor of goods must be allowed to use the internet as a tool to sell products. According to the EU Commission Regulation 330/2010, the internet is a reasonable way for customers to reach the distributor, and is therefore a form of passive selling. The technology of the internet allows a distributor to sell beyond its (territorial) boundaries.

Under EU Commission Regulation 330/2010, active forms of contacting customers outside the distributor’s agreed territory can be prohibited. The Commission cites the example of online advertising specifically targeted at certain customers. According to the European Commission, efforts targeting specifically a certain territory or a certain customer group is active selling into that territory or to that customer group (see the EU Guidelines Vertical Agreements for more details). This kind of marketing can be prohibited.

The supplier may be able to prohibit sales of its products via online marketplaces, when such sales damage its brand, especially in selective distribution systems.

Social media

It is accepted that a supplier should be able to protect its brand by limiting use of its trademarks and other intellectual property in social media accounts, and ensure that the distributor complies with its directions and guidelines regarding the use of social media.

Generally, minimum turnover clauses in distribution agreements are valid. When a distributor does not meet the minimum turnover targets, it can be a cause for termination of the agreement, if provided for in the agreement. Of course, a supplier still needs to treat the distributor fairly; very one-sided or onerous provisions may be not be deemed valid when enforcing such provisions is unreasonable under the given circumstances, and in such instances, a Dutch court could set aside such provision(s).

Contracts with a fixed period

When a distribution agreement has been concluded for a fixed period, in principle it is not possible to terminate the agreement early, unless specifically agreed in the agreement or on the occurrence of a material breach (the agreement should ideally have an option to terminate for material breach).

Contracts with an indefinite period

Dutch laws do not restrict or limit the right to terminate a distribution agreement of an indefinite term. However, this does not mean that a party can always terminate the agreement and, even if it can, it may be obliged to respect a certain notice period or pay compensation or indemnity, or both. The prevalent opinion of the Dutch Supreme Court is that an agreement with an indefinite term may, in principle, be terminated for convenience. However, under certain circumstances, a party may have to show cause to terminate the agreement.

It has been determined in case law and in literature that, on termination of a distribution agreement by the supplier, and in the absence of a contractually agreed notice period, the supplier must respect a reasonable termination period. What constitutes a reasonable notice period is very much dependent on the circumstances of the case. The duration of the relationship is seen as a key factor in determining the length of the notice period.

To give a very general indication:

• for an agreement with a duration between 0-1 years: 1 month termination period should be respected
• for an agreement with a duration between 1-2 years: 2 months
• for an agreement of more than 2 years: 1 month per year.

Another way of calculating the notice period is to apply a period of 1,2 months of notice for each year that parties have had a distribution relationship for the first 10 years, and a period of 0,8 month for each year thereafter.

There has been a discussion pending between scholars on whether or not a notice period should be longer than 12 months, as this could have a negative impact on the business, especially with a reluctant distributor continuing to represent the products/brand. However, there are several court decisions – also from higher Dutch courts – in which notice periods longer than 12 months have been granted. The maximum notice period so far granted by a Dutch court is three years (this has happened on several instances, particularly with very long lasting relationships).

Please note that a Dutch court is not bound by the general guidelines from existing case law with respect to a reasonable termination period. On the grounds of reasonableness and fairness, a court can determine what it deems to be an appropriate termination notice period under the given circumstances. Also, please note that in exceptional circumstances, for instance a distribution relationship that exists between parties for an exceptionally long period, a court can rule that it is not permissibnle for a supplier to unilaterally terminate the distribution relationship without having sufficient reason to do so. Such a ruling has been passed by the Dutch supreme court in the Latour/De Bruijn landmark decision, and has been confirmed by the Supreme Court in 2016 (Ronde Venen decision). Initially the High Court has granted a notice term of three years but the Dutch Supreme Court overturned this, and has decided that it is not always possible to terminate a distribution agreement without having sufficient reason/cause. In this particular instance, this rule was applied in light of the circumstances, specifically the long standing relationship between Latour and De Bruijn of nearly 100 years.

Some specific circumstances that a court may take into account when deciding upon the notice period:

• the length of the relationship (this seems to be the most important factor in most instances);
• the dependency of the distributor on the supplier (high, low etc.);
• the reasons for termination;
• exclusivity of the relationship;
• the size of the company of the supplier and the distributor, where Dutch courts often protect the “weaker” party;
• whether there are any statements from the supplier about the continuance of the relationship, future plans together etc.; and
• the performance of the distributor, was the distributor meeting its targets (if any), and other obligations.

(non-) renewal

In the event the supplier decides not to renew the distribution relationship upon the expiry of the term of the agreement, the aforementioned minimum notice periods may apply depending on the provisions contained in the agreement. In case of automatic renewal, the same provisions apply as above. However, in case of automatic termination, in principle there is no need to observe a minimum termination notice period, unless the supplier has indicated towards the distributor (explicitly or implicitly) that it wants to continue the agreement, also after expiration. To limit any potential liability, it is advisable to inform a distributor of the supplier’s decision not to renew a pending agreement in a timely manner.

Unlawful termination

In the event of an unlawful termination such as a termination with inadequate notice period, the supplier will be liable to compensate the distributor for damages suffered as a result of the unlawful termination. The distributor can also try to claim continued performance instead of the aforementioned damages. The latter is often enforced by an interim injunction procedure. Dutch courts tend to be available for such procedures on short notice – often within the timeframe of a couple of weeks.

Compensation for investments

In the event of termination of a distribution relationship, the supplier may be required to pay an indemnity for investments or costs made by the distributor, in case these investments cannot be earned back due to the termination of the contract, and the supplier was aware – or should have been aware – of the investments made. So far, a higher court in the Netherlands has not awarded goodwill compensation to a distributor upon the termination of a distribution agreement.

So far, in decisions of the higher courts in the Netherlands, no goodwill compensation has been awarded to a distributor. However, it may be kept in mind that there is an on-going debate in the literature on distribution relationships on whether goodwill compensation may be justified under certain circumstances. There are also ongoing discussions in the European about possibly applying agency legislation to distribution relationships. In surrounding countries, we are already seeing that distributors can be entitled to goodwill compensation. Based on the above, the possibility that goodwill compensation may be awarded to a distributor in the future cannot be ruled out.

Besides goodwill compensation, which has not been awarded in the Netherlands so far, a distributor may ask to be compensated in the event of an unlawful early termination. In some circumstances, a distributor may also be entitled to payment of a compensation for the costs and investments made by the distributor that cannot be earned back as a result of the unlawful termination.

Onerous conditions

Under Dutch law, onerous conditions do not need to be accepted specifically. However, in the event that seriously onerous conditions are contained in a distribution contract, the principle of reasonableness and fairness may cause these conditions to be invalidated, depending on the circumstances of the matter.

Articles 236 and 237 of Book 6 of the Dutch Civil Code contain a list of conditions that are either voidable, or considered to be void. Even though these (‘blacklisted’) conditions mainly apply to a business-to-consumer relationship, they may also apply to a business-to-business relationship in the event that the ‘affected’ party is considered to be a small business and the small business may be protected under these rules.

Principle of reasonableness and fairness (good faith)

In the Dutch legal system, the obligation to act in accordance with the principle of good faith is very important. Dutch civil laws are governed by the principle of reasonableness and fairness (in Dutch: ‘redelijkheid en billijkheid’). This principle also applies to distribution and may, for example, supplement the existing relationship or derogate from the contract that the parties agreed upon at an earlier stage. It is therefore possible to set aside a provision in an existing contract on the principle of reasonableness and fairness. It is difficult to say how a Dutch court will decide in a certain matter, given the fact that it will take into consideration every possible circumstance before taking its decision.

General limitation period

The general limitation period in the Netherlands is 20 years, according to article 306 of Book 3 of the Dutch Civil Code. Article 307 of Book 3 of the Dutch Civil Code prescribes the limitation period with regard to obligations arising from agreements (including possible damages claims) as five years.

Dutch Franchise Act

As mentioned in #1.3, when a distribution agreement qualifies as franchise under the Dutch Franchise Act, the mandatory provisions of the Franchise Act could apply.

The law applicable to distribution agreements is determined by the regulations of the Rome-I Regulation. Article 4 of the Rome-I Regulation states that the law of the place where the party that executes the characteristic performance is domiciled, is applicable to the contract.

Article 3 of the Rome-I Regulation provides contracting parties the freedom to choose the law of another country. Please note, however, that in the event the contract is concluded under foreign law, where all elements are connected with another country only (for example: two Dutch contracting parties, the distribution territory is the Netherlands etc.), the parties will still be bound by all mandatory rules of such country (article 3.3 of the Rome-I Regulation).

It is possible for an international distribution agreement to be governed by a foreign law. There are no restrictions on the parties’ contractual choice of a country’s law to govern a distribution contract. However, such choices need to be made explicitly by the parties.

Please note that when the distribution agreement qualifies as franchise under the new Dutch Franchise Act, and the franchise business is being operated in the Netherlands, the Franchise Act will apply irrespective of the choice of law contractually agreed in the distribution agreement.

Jurisdiction

It is possible to submit any disputes arising from an international distribution agreement to a foreign jurisdiction or to foreign arbitrators.

In the absence of a choice for another jurisdiction or arbitration, according to article 7 of the EU Regulation 1215/2012, a party to an agreement is entitled to bring a claim before a Dutch court if the contractual obligations are to be performed in the Netherlands. Therefore, it depends on the country in which the supplier or distributor are to perform their obligations. Tpically, obligations are to be performed at the distributor’s place of business.

Arbitration

The Netherlands is party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1958 (the New York Convention). In the event that a distribution agreement contains a foreign arbitration clause, a Dutch court will not consider itself to be a competent forum, provided that the arbitration clause is valid.

Disputes can be resolved before an arbitrator in cases where the contract contains a valid arbitration provision, or if parties agree upon arbitration after the dispute has started. The choice for arbitration has to be made in writing. The Netherlands Arbitration Institute (NAI, www.nai-nl.org/en/ ) is well regarded, and is generally less expensive than the more internationally well-known ICC arbitration.

Foreign businesses are not restricted in their ability to make use of these courts and procedures, and can expect fair treatment. In principle, there is no difference in the treatment of foreign and domestic business.

The Netherlands is a party to the New York Convention and, therefore, a foreign arbitral award is enforceable, unless there are reasons for refusal pursuant to the Convention.

Enforcement

With regard to the recognition of foreign judgments in the Netherlands, the provisions of the EU Regulation 1215/2012 apply. In case these provisions do not apply, articles 985-994 of the Dutch Code of Civil Procedure are applicable. Pursuant to these articles, a judgment can be executed after obtaining the approval of a Dutch court. However, in the event no bilateral treaty is applicable, article 431 of the Dutch Code of Civil Procedure prescribes that the matter be brought before a Dutch court that will decide upon the claim. If the outcome of the foreign judgment is similar to the outcome that will follow under Dutch law, the Dutch court may rule in conformity with the foreign judgment.

In the Netherlands, it usually takes up to three months before a court decides upon the enforceability of a foreign judgment (except when the counterparty appeals against the enforcement, in which case it will take much longer). A ‘regular’ court proceeding in the Netherlands can take up to one or two years, depending on the complexity of the case (complex cases may take three or even four years), and on the eventual appeal filed by a party.

In the event a foreign judgment is from an EU Member State, as per EU Regulation 1215/2012, the former exequatur proceedings are no longer required. Article 39 states that a judgment given in another EU Member State shall be enforceable without the requirement of any declaration of enforceability.

Netherlands Commercial Court

On 1 January 2019, the Netherlands Commercial Court was created (NCC). It is a chamber in the Amsterdam District Court, where parties may litigate before the Dutch court in the English language. A matter may be submitted to the NCC if:

• the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction;
• the parties have expressly agreed in writing that proceedings will be in English before the NCC;
• the action is a civil or commercial matter within the parties’ autonomy; and
• the matter concerns an international dispute.

With this in mind, court proceedings before the Dutch courts will generally be (much) cheaper than going through arbitration, will be objective and generally of similar quality. Therefore, unless there is a specific reason to choose arbitration, such as the need for confidentiality of the content of the proceedings or of the parties, the NCC is considered an appropriate forum, and is often preferred.