Distribution contracts can be agreed for a definite or indefinite term, and may contain an automatic renewal clause.
In case the distribution contract has been agreed for a definite term with no renewal clause, the contract terminates on the agreed termination date, and no further notification of termination is needed.
If there is a renewal clause in the contract, the parties shall be bound by it. Typically, the parties agree to a one-year duration, and successive yearly renewals unless one of the parties decides to give an advance notice of its desire to not to renew the contract.
The absence of an automatic renewal clause is not incompatible with the prolongation of the contract if, after its termination, the essential elements of an agreement still exist: consent, contractual object, and purpose. These elements must be clearly deduced after the stipulated termination of the contract. In order to determine if the agreement still continues, the existence of these elements cannot be confused with the mere knowledge of no opposition to the other party’s activity: To “know” the other party’s behaviour is different from “accepting” it.
This said, if both parties continue to perform their obligations under the contract even after its termination, the renewal will be effective and binding for the parties. Although the jurisprudence establishes that the regulation of the Agency Act is applicable on distribution contracts with some restrictions, Article 24.2 of the Agency Act can be considered a source of analogical interpretation for distribution contracts. This Article establishes that contracts with a specific duration that continue to be performed by the parties after the expiration of the agreed period will be considered as contracts with an indefinite duration. Please note that the intention of the parties to continue the relationship has to be clear and unambiguous. If this is not the case, the court can determine that the terms of the contract should prevail, and the conversion to an indefinite duration contract will not be accepted.
If the agreement is agreed for an indefinite term, parties are free to terminate it by giving the other party an advance termination notice. The Spanish legislation or the Courts do not regulate the specific period of notice for the parties to terminate a distribution contract, although some rules can been applied. When parties have not agreed to a specified notice period, the termination cannot be immediate, unexpected, or unjustified, but will depend on the circumstances of the case. Courts require a notice given with fair cause, without the abuse of right, and not contrary to the contractual good faith.
The absence of an advance notice (except in cases in which this absence is due to a reasonable reason, such as for example a previous breaching by the manufacturer) can be deemed to be an abuse of right, and while the termination of the agreement would be valid, the indemnity for damages could be demanded.
In some cases, courts have also held that an analogical application of the Agency Act to distribution agreements is possible even when the agreement is not in writing. In general terms, advance notice requirements contained in the Agency Act could be a useful criterion to analyse the notice period. Accordingly, a notice period of one month for every year the agreement is in force, with a minimum of one month and a maximum of six months (even for agreements lasting for more than six years) can be applicable.
But parties remain free to decide their notice period, and their agreement in the contract shall prevail over the application of the Agency Act. In this respect, for instance, the Supreme Court has previously upheld a notice period of only seven days as agreed between the parties in a sub-distribution contract. The court has also decided that, if not expressly mentioned in the contract, a notice period of two months is reasonable for the termination of a 15 year distribution agreement, as this notice period was deemed sufficient to permit the distributor to reorganise their activity in preparation of their business after the termination of the agreement.
If the parties have agreed a previous notice term, this term has to be effectively respected, and is independent on the reasons (consistent or not) given.
These rules are interesting to have a general idea, although the circumstances of the case are also relevant. For example, when an advance notice of termination was not considered necessary in a particular case where the distributor did not need to reorganise his commercial structure.
On the other hand, distribution agreements could be terminated with no previous notice under certain circumstances.
This is particularly true in cases of a material breach by the other party (lack of distribution or lack of supplies, for instance), or the attempt by one party to impose unilateral conditions that are not possible to fulfil or are against the general principles of good faith, and permit the non-breaching party to terminate the contract by a simple communication.
There are not provisions under the law for an advance notice in case of breach of contract. In contracts, parties usually agree to an immediate termination upon the receipt of the notification of breach. However, if the breach is in any way tolerated by the other party, it could be deemed that the problem no longer exists and, therefore, a termination on these grounds will likely not be accepted.
Regarding the form of the termination notice, there are no specific requirements unless otherwise agreed in the contract. The only question, hence, would be to prove that the notice has been duly served on the recipient, and the specific contents of the notice. For this reason, it is quite common to use a special notification instrument called burofax (which works as a registered letter, but it also allows to have a certified copy of the letter sent), or a letter sent thought a public notary. More recently, other ways of notifications using a third-party independent trustee services have been gaining acceptance.