Under Swiss law, distribution agreements may be entered into for a fixed or an indefinite period of time.
If a distribution agreement is concluded for a fixed period of time or its term is limited by virtue of its purpose (for example, by the nature of the products), it ends without notice upon the expiry of that term.
If a distribution agreement is concluded for an indefinite period of time, it may be terminated in accordance with the notice period set forth in the distribution agreement. In that regard, distribution agreements with a fixed term, but which are automatically extended respectively renewed if not terminated by any of the parties before the expiry of the fixed term, are also considered to be agreements concluded for an indefinite period of time.
In cases where distribution agreements do not stipulate the applicable notice period, the prevailing doctrine argues that Article 418q para. 1 CO regarding agency agreements applies by analogy in the first year of the distribution relationship, meaning that the distribution agreement can be terminated under observance of a one-month notice period, with effect as of the end of the subsequent calendar month. As from the second year of the distribution relationship, Article 546 CO regarding simple partnerships applies by analogy, so that the distribution relationship can be terminated by giving six months’ notice.
Both a distribution agreement concluded for a fixed or indefinite period of time may be terminated at any time with immediate effect for good cause. Good cause means that circumstances exist that render the continuation of the distribution relationship unacceptable for the terminating party. By way of example, the supplier may, for example, extraordinarily terminate the distribution relationship in case the distributor fails to pay the supply price to the supplier for the products on a lasting basis. On the other side, lasting violations of the distributor’s exclusivity rights by the supplier may give rise to an extraordinary termination right of the distributor. Parties may define "good cause" in the distribution agreement. This is particularly important if, for example, the non-achievement of certain minimum turnovers (see question 4) shall trigger an extraordinary termination right (with immediate effect or under observance of a relatively short notice period). Having said that, such definition only serves as an indication of what the parties deem to be unacceptable, and the courts will still have the authority to accept other non-enumerated circumstances as a good cause for a termination with immediate effect. With the exception of severe cases, the party that wishes to terminate a distribution agreement with immediate effect is required to notify the other party and request it to rectify an ongoing breach prior to giving notice of termination with immediate effect. Once the requirements for an extraordinary termination are met, notice of termination should be given without delay, ideally within a few days. Otherwise, the extraordinary termination may be considered to be late and therefore ineffective.
An unjustified termination of a distribution agreement with immediate effect is null and void, unless the distribution agreement states otherwise. Therefore, the party who received an unjustified termination with immediate effect may require the terminating party to continue complying with the obligations under the distribution agreement (for example, the supplier’s obligation to supply products to the distributor). If the terminating party refuses to do so, the other party may apply for a preliminary injunction.
Since ordinary and extraordinary terminations of distribution relationships are a frequent source of disputes, it is strongly recommended to clearly govern the consequences of the termination in the distribution agreement. For instance, it is usually in the interest of the supplier to state that the supplier has the right to purchase the remaining stock from the distributor at the end of the distribution relationship. Furthermore, since distributors are generally less committed to the distribution of products once notice has been given by either party, it is also helpful for the supplier to state that exclusivity shall automatically lapse during the notice period, so that a new distributor can become active or the supplier can vertically integrate the distribution activities as soon as feasible, without being restricted from doing so because of ongoing exclusivity rights of the former distributor.
For further reduction of the risk of disputes in connection with the termination of distribution agreements, the parties may also enter into termination or settlement agreements.