Mediation and franchise agreements

10 April 2018

  • Spain
  • Distribution
  • Franchising

In all M&A operations one of the issues that deserves special attention as regards its analysis, ascertainment and negotiation is the tax liabilities. Even though the parties could agree on the amount of such contingencies, to negotiate the possible guarantees that the seller should grant in order to protect the buyer from a possible claim by the tax authorities, the term during which the guarantees should be in force, and to agree on the communication mechanisms between the parties (buyer and seller) and the legal defense strategies if such claim from the tax authorities arises, requires substantial negotiation efforts.

When the acquisition operation is formalized not through the purchase of shares, but through the purchase of the assets that form a business unit, the Spanish General Tax Law (“Ley General Tributaria” or “LGT”) provides a mechanism which implies an exception to the general principle provided by article 42 of the same law. Article 42 of LGT establishes the joint liability of the purchaser of a business unit for the tax liabilities of the selling company (“tax liability derived from company’s succession”). That is, in principle, according to article 42 of the LGT “the persons or entities that continue by any mean in the ownership or exercise of economic activities (the buyers) will be jointly liable with the previous owner for the tax liabilities derived from the exercise of such economic activities incurred by such previous owner”.

However, the joint tax liability of the buyer could be limited through the application before the tax authorities of the tax certificate regulated by article 175.2 of the LGT. This certificate should be applied for by the prospective buyer, with the authorization of the present owner (the seller), and, once issued, the tax liability of the buyer becomes limited to the debts, penalties and liabilities mentioned in the certificate. If the certificate is issued without mentioning any amount, or if the tax authorities do not issue it within a three months term from the application’s date, the applicant (the buyer) will be released from any tax liability derived from company’s succession.

The tax certificate for succession purposes includes the main taxes, as Value Added Tax and Corporate Income Tax, and can include as well debts derived from the withholding taxes on employees’ payroll, which in case of companies with a big number of employees could be of an outstanding amount. However, the buyer’s joint liability for salaries, related payroll amounts and social security contributions cannot be limited by such certificate, and such liability will always be joint with the business unit seller’s liability.

The application for the tax certificate should be filed before the acquisition of the business unit is completed, even if the issuance of the certificate takes place later tan the closing date (but of course, it is wiser to not close the acquisition before having the certificate). The certificate’s validity lasts for one year, as regards periodical tax obligations (for example, Value Added Tax, Corporate Income Tax and withholding taxes on salaries) and for three months as regards non periodical tax obligations.

It is very important to apply for the right tax certificate (“certificate for succession purposes according to article 175.2 of LGT”), and to not make a mistake and apply, for example, for the certificate regarding having fulfilled all tax obligations (“certificado de estar al corriente de las obligaciones fiscales”). Case law is plenty of judgments where a buyer applied for the wrong certificate, which showed no liabilities, and later on such buyer has been sentenced to pay the tax liabilities incurred by the previous owner of the business unit.

The remuneration of directors is an intricate issue and one that deserves adequate treatment. Recently there has been a turn that deserves special attention.

In its judgment of February 26, 2018, the Supreme Court modified the interpretation given by most experts and authorities and by the Directorate-General of Registries and the Notarial Profession in its decision dated June 17, 2016, ratified by the Barcelona Provincial Appellate Court in its decision 295/2017 of June 30, 2017, on the regulation of executive directors’ compensation.

In its judgment, the Supreme Court held that the compensation of directors “in their capacity as such” includes the compensation of both deliberative and executive functions and that, accordingly, approval of the compensation of directors who discharge executive functions is subject not only to article 249 of the Corporate Enterprises Law (i.e., the requirement for there to be a contract approved by a two-thirds majority of the board) but also to article 217. Consequently:

  1. the bylaws must stipulate the compensation scheme for executive functions (although no reference is made to amount); and
  2. the amount payable for the discharge of executive functions must be included in the maximum annual amount stipulated by the shareholders’ meeting.

The judgment was handed down in connection with a limited liability company and, furthermore, some of its considerations refer specifically to unlisted companies, although it does not clearly and indubitably exclude listed companies (which are, however, subject to specific rules under the compensation policy).

The publication of this Supreme Court judgment gives rise to the need for an individualized analysis of each specific case, so that the appropriate measures can be taken to enable companies to bring their policies into line with its conclusions.

The author of this post is Pablo Vinageras.

Once convinced of the utility of mediation as a method of resolving conflicts between franchisor and franchisee and taken the decision to include a clause in the contracts that provides for it, the last step would be what elements should be taken into account when drafting it.

  1. The previous negotiation. It seems advisable that both parties grant themselves the possibility of trying to solve the problem with a previous formal negotiation. Mediation does not exclude the previous attempt made by the interested parties or their lawyers; however, it seems advisable to contractually provide a suitable end according to the circumstances. Experience shows that lengthening this phase too long may result in the conflict becoming more complicated and even more difficult to approach mediation.
  2. The clause may also provide for the place where the mediation will take place. Again at this point the parties are free. It is convenient that this is accurate indicating the concrete city.
  3. The language in which the mediation will be developed is the a faculty of the parties. There will be no difficulty in mediations in which both parties use the same language, but it is very convenient in contracts with parties that have different languages, or that belong to regions or countries with different co-official languages. The drafting or signing of the contract in a specific language does not presuppose that this must be the language of the mediation. It is an element to be taken into account also when requesting a mediator who can use that language in the chosen mediation institution.
  4. The procedure can also be decided by the parties. In particular, the number of sessions, the maximum expected duration, the participation of advisors, etc. Keep in mind that the greater or lesser regulation will allow to avoid future conflicts in this respect, although it will also imply a greater limit to the freedom of the parties that, nevertheless, will remain free to modify the agreement by mutual consent.
  5. The term of the mediation can also be contemplated. This would allow, for example, to prevent mediation from being extended only for purely procedural strategic purposes or to gather information from the other party before starting a procedure, etc. The professional mediators, however, are able to identify these manoeuvres, also having the power to put an end to mediation in those cases.
  6. Choosing the mediator or the mediation institution is an important choice. The parties can agree on who will be their mediator, indicate in the contract the elements to choose it, or submit directly to a Mediation Institution so that it is the one who designates it according to its own rules. These decisions can be alternatives (that is, that the parties agree on the mediator and, in case of lack of agreement, submit to an institution that names it), or they can be unique. The designation of an Institution requires that it has a sufficient guarantee of stability (avoid designating short-term institutions or without much future guarantee), with a sufficient panel of mediators depending on the characteristics of the mediation (language, competence, experience) and that allows the necessary flexibility for its operation.
  7. Finally, it is convenient that the clause includes an alternative way in case the mediation does not succeed either because the parties do not reach an agreement, or because they withdraw from the mediation. It is important to recall that mediation does not close the doors to the conflict be resolved by recourse to ordinary jurisdiction or arbitration. And in terms of specialized arbitration in distribution contracts, the IDArb (https://www.idiproject.com/content/idarb-idi-arbitration-project) is an excellent option.

On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:

  1. Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
  2. If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
  3. The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
  4. By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
  5. In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
  6. It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
  7. Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
  8. Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.

On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

It is recommended that franchise agreements clearly foresee how to solve and deal with potential conflicts. The relationship between franchisor and franchisee may have some difficulty due, for example, to the absence of specific regulation of its content (at least in Spain) and to the fact that its elements are contained in different pieces of legislation. What I will say in these posts could also be useful for other distribution contracts, or in general collaboration agreements, although I will focus on franchising due to its special characteristics.

Conflicts between franchisees and franchisors can cover multiple legal and commercial aspects: product supplies, brands, know-how, exclusivity and territory, non-competition, promotion and advertising, sales through the Internet … And all this, in a context in which, frequently, both parties want to maintain their collaboration and good relations.

How to face, then, these potential conflicts? A first step is usually the direct negotiation between the parties and their advisers who have the task of being useful to them in this purpose. But this does not always end with a positive result. And the almost natural step if this happens is usually the beginning of a judicial procedure often preceded by a series of previous formal requirements.

However, there is a way that, taking into account the characteristic elements of the franchise contract and the nature of possible conflicts, can be an excellent and privileged alternative method to solve them: mediation. Let’s see why:

  1. In mediation there is no third party that imposes its decision on the conflict. The franchisor and the franchisee solve it by themselves with the help of a professional (the mediator) who, in a neutral and independent way, uses their skills and specifically acquired knowledge (help in identifying the interests of the parties, active listening, legitimacy …) so that both can reach a consensus. The mediator does not advise (the parties can go with their respective advisors), it does not decide or sentence, but it helps that the parties find the solution that most satisfies both: they better than anyone else know the business, its evolution, the aspects perhaps not foreseen in the contract and the future that they want for themselves.
  2. Mediation is a harmonized mode of dispute resolution in the European Union through the Directive on certain aspects of mediation in civil and commercial matters. This allows the parties in different Member States to be familiar with it, therefore it is possible to foresee a unified system in contracts with international parties, and it will be easier to enforce the agreements reached.
  3. Mediation allows, therefore, to satisfy both parties better than the judicial alternative and with more creative solutions that a judge will never be able to apply. Unlike a legal proceeding where one usually wins and another loses, mediation can bring together the interests of franchisees and franchisors and, in this way, both obtain a better response. It allows a less belligerent and more friendly format that can be very useful since in many cases the disputes do not have too much entity to go to court, or refer to non-essential aspects of the relationship, or can be addressed from more global perspectives or with references to objective parameters. In addition, frequently, franchisees and franchisors want to continue maintaining their commercial relationship and, through mediation, resolved the conflict, this will be possible (unthinkable, however, if they had initiated a judicial confrontation).
  4. Mediation is, in principle, voluntary. At any time, the parties can abandon it even in those Member States or conflicts for which it may be mandatory to attend at least to the information session.
  5. It is a method that easily adapts to the characteristics of both parties: it is very flexible with the formalities, and the franchisor and the franchisee are who, with the help of the mediator, design a large part of the procedure to arrive at a solution being able to control its evolution. It also allows a solution that is much more adapted to their specific situation, provides more imaginative solution ideas, allows better dialogue, maintains the relationship, distinguishes facts from opinions or judgments, and allows the parties to return to their business saving energies that would otherwise be devoted to conflict management.
  6. It is a faster procedure than a trial, with a cost that can be assumed and controlled in advance.
  7. Mediation is confidential, so the publicity of the conflict is reduced, avoiding reputation costs or by extending to the rest of the network. What is treated in a mediation procedure cannot be disclosed even in a subsequent judicial proceeding.
  8. Both parties can arrive at a solution that will be binding for them. In addition, even if no agreement is reached, with the mediation the parties are in a better position to continue the relationship and resolve their problems: they have been able to present their points of view, they have been heard and have listened, they have opened dialogue channels, they have been able to show greater flexibility and, in short, they have improved their relations as a requirement to end the conflict and reach agreements.
  9. The degree of compliance with conflicts resolved through mediation is much higher than those imposed by a judge since the agreements are more satisfactory for them and it has been the parties themselves who have decided what to do.
  10. And finally, if the mediation has not worked, the possibility of claiming in the courts remains open.

Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

The signature of the contract

Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

The proper choice of contract

If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

Monitoring of legal and business relations

If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

Evidences about customers

In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

Evidences on purchases and sales

Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

Damages in case of termination of contracts

Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

The change in ownership of a company, of a working place or of an autonomous production unit will not extinguish by itself the employment relationship, and the new employer will be subrogated in the labour rights and obligations and in the Social Security obligations from the previous employer.

Company Succession shall be considered to exist when the transmission affect to the economic entity which maintains his identity, understood as an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

The transferor and the transferee shall be jointly and severally liable during three years for the labour obligations born beforehand the transmission and which had not been satisfied.

The transferor and the transferee have to report to the legal representatives of the affected employees by the change in the ownership about the following:

  • Expected time of the transmission.
  • Reasons for the transmission.
  • Legal, economic and social consequences of the transmission to the employees.
  • Measures envisaged in relation to the employees.

If there are no legal representatives of the employees the transferor and the transferee shall provide that information directly to the affected employees.

Occupational risk prevention

The law 31/1995 of Prevention of risks at the workplace has the objective of promote the security and the health of the employees’ through the application of measures and the development of the necessary activities to the prevention of risks derived from work.

For that purpose, the Law establishes the general principles concerning the prevention of professional risks for the protection of the life and health.

Under Spanish law a labour contract may be suspended by the following causes:

  • Mutual agreement of the Parties.
  • The legitimate causes consigned in the contract.
  • Temporary incapacity of the employee.
  • Maternity, paternity, risk during pregnancy, risk during breastfeeding, and adoption or family placement.
  • Military service.
  • Holding a representative public charge.
  • Deprivation of the liberty of the employee, as long as a condemnatory sentence does not exists.
  • Suspension from duties without pay for disciplinary reasons.
  • Temporary force majeure.
  • For economic, technical, organizational or production causes.
  • Forced leave of absence.
  • For exercising the right to strike.
  • Legal closing of the company.
  • For decision of the employee as a consequence of gender-based violence.

The suspension of the contract exonerates the reciprocal obligations of working and remunerating the work.

Leaves

The leave can be voluntary or forced. The forced leave will give the right to return to the same workplace and to the computation of the seniority, this leave will be given cause by the designation or the election for a public charge which makes impossible to assist to the work. The readmission has to be applied on the following month since the cessation in the public charge.

The employee with seniority in the company of one year has the right to ask and have the opportunity of having the voluntary leave for a period of time between four months and five years. This right is only possible if four years since the last leave have passed.

The employees will have the right for a leave period for no more than three years to attend the care of every son.

The employee in leave will keep only a preferential right to re-entry in a vacant in the same or similar category in relation with his position.

Ignacio Alonso

Practice areas

  • Agency
  • Corporate
  • Distribution
  • Franchising
Contact Ignacio

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    Commercial distribution contracts – Six key questions to consider

    30 November 2017

    • Spain
    • Agency
    • Contracts
    • Distribution
    • International trade

    In all M&A operations one of the issues that deserves special attention as regards its analysis, ascertainment and negotiation is the tax liabilities. Even though the parties could agree on the amount of such contingencies, to negotiate the possible guarantees that the seller should grant in order to protect the buyer from a possible claim by the tax authorities, the term during which the guarantees should be in force, and to agree on the communication mechanisms between the parties (buyer and seller) and the legal defense strategies if such claim from the tax authorities arises, requires substantial negotiation efforts.

    When the acquisition operation is formalized not through the purchase of shares, but through the purchase of the assets that form a business unit, the Spanish General Tax Law (“Ley General Tributaria” or “LGT”) provides a mechanism which implies an exception to the general principle provided by article 42 of the same law. Article 42 of LGT establishes the joint liability of the purchaser of a business unit for the tax liabilities of the selling company (“tax liability derived from company’s succession”). That is, in principle, according to article 42 of the LGT “the persons or entities that continue by any mean in the ownership or exercise of economic activities (the buyers) will be jointly liable with the previous owner for the tax liabilities derived from the exercise of such economic activities incurred by such previous owner”.

    However, the joint tax liability of the buyer could be limited through the application before the tax authorities of the tax certificate regulated by article 175.2 of the LGT. This certificate should be applied for by the prospective buyer, with the authorization of the present owner (the seller), and, once issued, the tax liability of the buyer becomes limited to the debts, penalties and liabilities mentioned in the certificate. If the certificate is issued without mentioning any amount, or if the tax authorities do not issue it within a three months term from the application’s date, the applicant (the buyer) will be released from any tax liability derived from company’s succession.

    The tax certificate for succession purposes includes the main taxes, as Value Added Tax and Corporate Income Tax, and can include as well debts derived from the withholding taxes on employees’ payroll, which in case of companies with a big number of employees could be of an outstanding amount. However, the buyer’s joint liability for salaries, related payroll amounts and social security contributions cannot be limited by such certificate, and such liability will always be joint with the business unit seller’s liability.

    The application for the tax certificate should be filed before the acquisition of the business unit is completed, even if the issuance of the certificate takes place later tan the closing date (but of course, it is wiser to not close the acquisition before having the certificate). The certificate’s validity lasts for one year, as regards periodical tax obligations (for example, Value Added Tax, Corporate Income Tax and withholding taxes on salaries) and for three months as regards non periodical tax obligations.

    It is very important to apply for the right tax certificate (“certificate for succession purposes according to article 175.2 of LGT”), and to not make a mistake and apply, for example, for the certificate regarding having fulfilled all tax obligations (“certificado de estar al corriente de las obligaciones fiscales”). Case law is plenty of judgments where a buyer applied for the wrong certificate, which showed no liabilities, and later on such buyer has been sentenced to pay the tax liabilities incurred by the previous owner of the business unit.

    The remuneration of directors is an intricate issue and one that deserves adequate treatment. Recently there has been a turn that deserves special attention.

    In its judgment of February 26, 2018, the Supreme Court modified the interpretation given by most experts and authorities and by the Directorate-General of Registries and the Notarial Profession in its decision dated June 17, 2016, ratified by the Barcelona Provincial Appellate Court in its decision 295/2017 of June 30, 2017, on the regulation of executive directors’ compensation.

    In its judgment, the Supreme Court held that the compensation of directors “in their capacity as such” includes the compensation of both deliberative and executive functions and that, accordingly, approval of the compensation of directors who discharge executive functions is subject not only to article 249 of the Corporate Enterprises Law (i.e., the requirement for there to be a contract approved by a two-thirds majority of the board) but also to article 217. Consequently:

    1. the bylaws must stipulate the compensation scheme for executive functions (although no reference is made to amount); and
    2. the amount payable for the discharge of executive functions must be included in the maximum annual amount stipulated by the shareholders’ meeting.

    The judgment was handed down in connection with a limited liability company and, furthermore, some of its considerations refer specifically to unlisted companies, although it does not clearly and indubitably exclude listed companies (which are, however, subject to specific rules under the compensation policy).

    The publication of this Supreme Court judgment gives rise to the need for an individualized analysis of each specific case, so that the appropriate measures can be taken to enable companies to bring their policies into line with its conclusions.

    The author of this post is Pablo Vinageras.

    Once convinced of the utility of mediation as a method of resolving conflicts between franchisor and franchisee and taken the decision to include a clause in the contracts that provides for it, the last step would be what elements should be taken into account when drafting it.

    1. The previous negotiation. It seems advisable that both parties grant themselves the possibility of trying to solve the problem with a previous formal negotiation. Mediation does not exclude the previous attempt made by the interested parties or their lawyers; however, it seems advisable to contractually provide a suitable end according to the circumstances. Experience shows that lengthening this phase too long may result in the conflict becoming more complicated and even more difficult to approach mediation.
    2. The clause may also provide for the place where the mediation will take place. Again at this point the parties are free. It is convenient that this is accurate indicating the concrete city.
    3. The language in which the mediation will be developed is the a faculty of the parties. There will be no difficulty in mediations in which both parties use the same language, but it is very convenient in contracts with parties that have different languages, or that belong to regions or countries with different co-official languages. The drafting or signing of the contract in a specific language does not presuppose that this must be the language of the mediation. It is an element to be taken into account also when requesting a mediator who can use that language in the chosen mediation institution.
    4. The procedure can also be decided by the parties. In particular, the number of sessions, the maximum expected duration, the participation of advisors, etc. Keep in mind that the greater or lesser regulation will allow to avoid future conflicts in this respect, although it will also imply a greater limit to the freedom of the parties that, nevertheless, will remain free to modify the agreement by mutual consent.
    5. The term of the mediation can also be contemplated. This would allow, for example, to prevent mediation from being extended only for purely procedural strategic purposes or to gather information from the other party before starting a procedure, etc. The professional mediators, however, are able to identify these manoeuvres, also having the power to put an end to mediation in those cases.
    6. Choosing the mediator or the mediation institution is an important choice. The parties can agree on who will be their mediator, indicate in the contract the elements to choose it, or submit directly to a Mediation Institution so that it is the one who designates it according to its own rules. These decisions can be alternatives (that is, that the parties agree on the mediator and, in case of lack of agreement, submit to an institution that names it), or they can be unique. The designation of an Institution requires that it has a sufficient guarantee of stability (avoid designating short-term institutions or without much future guarantee), with a sufficient panel of mediators depending on the characteristics of the mediation (language, competence, experience) and that allows the necessary flexibility for its operation.
    7. Finally, it is convenient that the clause includes an alternative way in case the mediation does not succeed either because the parties do not reach an agreement, or because they withdraw from the mediation. It is important to recall that mediation does not close the doors to the conflict be resolved by recourse to ordinary jurisdiction or arbitration. And in terms of specialized arbitration in distribution contracts, the IDArb (https://www.idiproject.com/content/idarb-idi-arbitration-project) is an excellent option.

    On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

    We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:

    1. Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
    2. If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
    3. The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
    4. By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
    5. In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
    6. It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
    7. Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
    8. Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.

    On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

    It is recommended that franchise agreements clearly foresee how to solve and deal with potential conflicts. The relationship between franchisor and franchisee may have some difficulty due, for example, to the absence of specific regulation of its content (at least in Spain) and to the fact that its elements are contained in different pieces of legislation. What I will say in these posts could also be useful for other distribution contracts, or in general collaboration agreements, although I will focus on franchising due to its special characteristics.

    Conflicts between franchisees and franchisors can cover multiple legal and commercial aspects: product supplies, brands, know-how, exclusivity and territory, non-competition, promotion and advertising, sales through the Internet … And all this, in a context in which, frequently, both parties want to maintain their collaboration and good relations.

    How to face, then, these potential conflicts? A first step is usually the direct negotiation between the parties and their advisers who have the task of being useful to them in this purpose. But this does not always end with a positive result. And the almost natural step if this happens is usually the beginning of a judicial procedure often preceded by a series of previous formal requirements.

    However, there is a way that, taking into account the characteristic elements of the franchise contract and the nature of possible conflicts, can be an excellent and privileged alternative method to solve them: mediation. Let’s see why:

    1. In mediation there is no third party that imposes its decision on the conflict. The franchisor and the franchisee solve it by themselves with the help of a professional (the mediator) who, in a neutral and independent way, uses their skills and specifically acquired knowledge (help in identifying the interests of the parties, active listening, legitimacy …) so that both can reach a consensus. The mediator does not advise (the parties can go with their respective advisors), it does not decide or sentence, but it helps that the parties find the solution that most satisfies both: they better than anyone else know the business, its evolution, the aspects perhaps not foreseen in the contract and the future that they want for themselves.
    2. Mediation is a harmonized mode of dispute resolution in the European Union through the Directive on certain aspects of mediation in civil and commercial matters. This allows the parties in different Member States to be familiar with it, therefore it is possible to foresee a unified system in contracts with international parties, and it will be easier to enforce the agreements reached.
    3. Mediation allows, therefore, to satisfy both parties better than the judicial alternative and with more creative solutions that a judge will never be able to apply. Unlike a legal proceeding where one usually wins and another loses, mediation can bring together the interests of franchisees and franchisors and, in this way, both obtain a better response. It allows a less belligerent and more friendly format that can be very useful since in many cases the disputes do not have too much entity to go to court, or refer to non-essential aspects of the relationship, or can be addressed from more global perspectives or with references to objective parameters. In addition, frequently, franchisees and franchisors want to continue maintaining their commercial relationship and, through mediation, resolved the conflict, this will be possible (unthinkable, however, if they had initiated a judicial confrontation).
    4. Mediation is, in principle, voluntary. At any time, the parties can abandon it even in those Member States or conflicts for which it may be mandatory to attend at least to the information session.
    5. It is a method that easily adapts to the characteristics of both parties: it is very flexible with the formalities, and the franchisor and the franchisee are who, with the help of the mediator, design a large part of the procedure to arrive at a solution being able to control its evolution. It also allows a solution that is much more adapted to their specific situation, provides more imaginative solution ideas, allows better dialogue, maintains the relationship, distinguishes facts from opinions or judgments, and allows the parties to return to their business saving energies that would otherwise be devoted to conflict management.
    6. It is a faster procedure than a trial, with a cost that can be assumed and controlled in advance.
    7. Mediation is confidential, so the publicity of the conflict is reduced, avoiding reputation costs or by extending to the rest of the network. What is treated in a mediation procedure cannot be disclosed even in a subsequent judicial proceeding.
    8. Both parties can arrive at a solution that will be binding for them. In addition, even if no agreement is reached, with the mediation the parties are in a better position to continue the relationship and resolve their problems: they have been able to present their points of view, they have been heard and have listened, they have opened dialogue channels, they have been able to show greater flexibility and, in short, they have improved their relations as a requirement to end the conflict and reach agreements.
    9. The degree of compliance with conflicts resolved through mediation is much higher than those imposed by a judge since the agreements are more satisfactory for them and it has been the parties themselves who have decided what to do.
    10. And finally, if the mediation has not worked, the possibility of claiming in the courts remains open.

    Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

    These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

    The signature of the contract

    Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

    The proper choice of contract

    If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

    Monitoring of legal and business relations

    If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

    Evidences about customers

    In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

    Evidences on purchases and sales

    Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

    Damages in case of termination of contracts

    Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

    The change in ownership of a company, of a working place or of an autonomous production unit will not extinguish by itself the employment relationship, and the new employer will be subrogated in the labour rights and obligations and in the Social Security obligations from the previous employer.

    Company Succession shall be considered to exist when the transmission affect to the economic entity which maintains his identity, understood as an organized grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary.

    The transferor and the transferee shall be jointly and severally liable during three years for the labour obligations born beforehand the transmission and which had not been satisfied.

    The transferor and the transferee have to report to the legal representatives of the affected employees by the change in the ownership about the following:

    • Expected time of the transmission.
    • Reasons for the transmission.
    • Legal, economic and social consequences of the transmission to the employees.
    • Measures envisaged in relation to the employees.

    If there are no legal representatives of the employees the transferor and the transferee shall provide that information directly to the affected employees.

    Occupational risk prevention

    The law 31/1995 of Prevention of risks at the workplace has the objective of promote the security and the health of the employees’ through the application of measures and the development of the necessary activities to the prevention of risks derived from work.

    For that purpose, the Law establishes the general principles concerning the prevention of professional risks for the protection of the life and health.

    Under Spanish law a labour contract may be suspended by the following causes:

    • Mutual agreement of the Parties.
    • The legitimate causes consigned in the contract.
    • Temporary incapacity of the employee.
    • Maternity, paternity, risk during pregnancy, risk during breastfeeding, and adoption or family placement.
    • Military service.
    • Holding a representative public charge.
    • Deprivation of the liberty of the employee, as long as a condemnatory sentence does not exists.
    • Suspension from duties without pay for disciplinary reasons.
    • Temporary force majeure.
    • For economic, technical, organizational or production causes.
    • Forced leave of absence.
    • For exercising the right to strike.
    • Legal closing of the company.
    • For decision of the employee as a consequence of gender-based violence.

    The suspension of the contract exonerates the reciprocal obligations of working and remunerating the work.

    Leaves

    The leave can be voluntary or forced. The forced leave will give the right to return to the same workplace and to the computation of the seniority, this leave will be given cause by the designation or the election for a public charge which makes impossible to assist to the work. The readmission has to be applied on the following month since the cessation in the public charge.

    The employee with seniority in the company of one year has the right to ask and have the opportunity of having the voluntary leave for a period of time between four months and five years. This right is only possible if four years since the last leave have passed.

    The employees will have the right for a leave period for no more than three years to attend the care of every son.

    The employee in leave will keep only a preferential right to re-entry in a vacant in the same or similar category in relation with his position.

    Ignacio Alonso

    Practice areas

    • Agency
    • Corporate
    • Distribution
    • Franchising
    Contact Ignacio