Distribution Agreements in Spain

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How are distribution agreements regulated in Spain?

Currently, there is no specific legislation in Spain governing distribution contracts. Therefore, these contracts are constructed under the general freedom for contracting, regulated under Article 1255of the Civil Code.

There are also some governing rules made by the academia, and case-law by the Supreme Court. Other local jurisprudence by the Courts of Appeal (Audiencias Provinciales) can also be used to interpret these contracts.

The Supreme Court has held that a distribution agreement is a collaborative contract in which a distributor, either a person or a legal entity, acts independently on its own behalf, under the supervision of a supplier based on their respective trust, with certain post-selling obligations, and sometimes with exclusivity clauses.

The Spanish Supreme Court has considered the distribution agreement an atypical contract this is not expressly regulated, similar to, under some circumstances, the exclusive supply agreement, or reselling and rendering services agreements. This contract should not be considered an Agency agreement and, therefore, the Agency Agreement Directive is not applicable to them.

Nevertheless, the Supreme Court has also established that under some circumstances, certain rules of the Agency Act are applicable, by analogy to distribution agreements as interpretative criteria or “inspiring principles”, while respecting the differences. In this sense, all agency regulations will not be applicable, only certain principles or criteria whereby both contracts have the same or similar reason. The analogy is not to be applied automatically, but should be used as a guiding rule considering the circumstances between the parties and the characteristics of the relevant market. This is specifically the case for the issue of goodwill indemnity (compensation for clients), its limits, and how to calculate it, but the courts have declined to to apply the time-limits foreseen in the Agency regulation.

Other Rules that affect distribution agreements are under the Spanish anti-trust law (Ley de Defensa de la Competencia 15/2007), which prohibits, in similar terms to the EU antitrust rules, the direct or indirect resale price fixing, market sharing, as well as other commercial conditions.

Some aspects of the Retail Act (Ley del Comercio Minorista) have also to be considered applicable to distribution agreements, particularly from a commercial perspective, even though some aspects are regulated by local and regional specificities (for instance, period of sales) The European Union Competition rules are part of internal Spanish law (such as, for instance, Section 101 of the Treaty on the Functioning of the European Union (TFEU), and the Commission Regulation No 330/2010 (Vertical Block Exemption Regulation)).

How to appoint a distributor in Spain

The distributor can be either a physical or a legal person (commercial company). They act on their own behalf as an independent buyer and reseller of the products manufactured by the supplier, and commits their organization to the supplier’s disposal for the distribution of the products within a territory.

Usually, the relationship between both parties goes beyond mere purchase and resale activities, and implies the incorporation of the distributor into the supplier’s network, and some continuity may also be necessary.

Under Spanish Law, there are no special legal requirements in order to be appointed as a distributor, no special registry (different to the general one to act as an entrepreneur) or professional record is required, and commercial rules are applicable in general terms similar to the manner applicable in all the different Spanish regions. There are no restrictions on the citizenship of the distributor, and foreigners can be appointed provided they respect the same rules (particularly tax ones) as the Spaniards.

The distributor’s profit is the difference between the price he has paid to the supplier for the products and the price received by him upon resale. A distributor acts as an exclusive owner of the goods when reselling them. Therefore, in cases where a contractor purchases the products in his own name and then resells them, the courts are inclined to consider such a relationship as a distributorship agreement instead of an agency agreement, irrespective of the name given to the agreement by the parties.

A distribution contract can be validly executed either in writing or orally. If the agreement is in writing, both parties will sign it and will be bound by its contents. It is also possible to enter into a written agreement through an exchange of correspondence. An oral agreement is also valid, although it will be more complicated to prove the agreement and its contents and clauses, particularly to differentiate it from a mere purchase-resell relationship, and some restrictive clauses such as the territory, the exclusivity, minimum purchases, etc.

In this respect, Courts have held that in the absence of a written agreement, some elements need deeper analysis in order to determine whether the agreement is a distribution agreement instead of a mere purchase-resell agreement. Some of these elements are, for instance, the geographical area in which the products are sold, the exclusivity in a particular area, duration, continuity in the provision of products, the fact that once the relationship ended, a new company was appointed for the distribution of products, the existence of a bank warranty, the fact that the manufacturer also provided labels for the products, and the way the orders worked between the parties.

In fact, the most frequently occurring clauses in a distribution contract are usually exclusivity (both possibilities are acceptable: the distributor will only sell the manufacturer’s products, and the manufacturer will only appoint a distributor in that area), minimum turnovers, the use of manufacturer’s trademarks, and non-compete obligations either during or after the termination of the agreement.

In light of the above, it is always advisable to have a written agreement to avoid future conflicts, and also considering that clauses permitting one party to unilaterally modify the agreements are not valid.

Exclusive distribution in Spain

As mentioned before, distribution agreements are not regulated by a specific piece of legislation. Therefore, parties are free to agree the terms and conditions in their contracts. There are no mandatory elements or clauses to be considered. There are, however, some restrictions such as resale price fixing, which is not permitted under competition rules.

Parties are, therefore, free to decide, for example, on the annual sales, and the parties should respect such agreed terms. The courts will nevertheless interpret the contracts according to the general rules of law, good faith and fairness.

The exclusivity clause is considered a restrictive clause, and for this reason, its existence has to be clearly proven when it is not expressly included in a contract. This means that the scope of this clause should be clearly agreed in order to know the complete extent and application. A distribution contract does not necessarily imply that the exclusivity exists.

Leaving aside the problem of its validity under EU antitrust law, an exclusivity clause usually implies that the distributor is the only authorised person to sell the goods within the exclusive territory. These clauses usually do not imply that the supplier has to take the necessary measures in order to avoid possible exports by other customers to the distributor’s exclusive territory, and “parallel imports” also cannot be avoided by the supplier.

There is scope, however, for assuming that the exclusivity has been granted tacitly. In order to prove implied exclusivity, it is necessary to verify, for instance, the behaviour and will of the parties, the circumstances of the agreement, the presumptions of the case, the use of the name/trademark of the manufacturer, or other elements that could show the conduct implying exclusivity is accepted by both parties.

The exclusivity clause does not by itself guarantee that the supplier cannot sell to customers in a distributor’s territory. In order to be valid, such a clause has to be expressly provided for in the agreement. In fact, courts have held that the possibility of direct supply can be seen as an exception to the exclusivity clause, at least in distribution agreements with an indefinite duration.

Exclusivity can be agreed either positively (to sell only to the distributor) or negatively (not to anyone else) within a specific territory. This condition to not to sell to customers outside the territory is not by itself included in a simple exclusivity clause, and could be considered as restriction of competition.

Contractually, it is possible to delimit the extent of the distributor’s exclusivity either with the rights of the supplier to make direct sales in the territory, or by reserving the supplier’s right to supply certain customers. This has been expressly accepted in some cases where the courts have considered the possibility of direct sales as an acceptable exception to the exclusivity.

Non-competition obligation cannot usually be implied in a distribution contract if they are not expressly contained in the agreement. These kinds of clauses, being restrictive, should be expressly agreed in writing between the parties.

Parties are free to impose non-compete restrictions on the distributor during the existence of the contract, and such a clause is often included in the distribution contracts.

It is also possible to contractually extend the distributor’s non-compete obligation to the distribution of non-competing goods of competing manufacturers. In order to determine whether a product is competing or not with other products, it is necessary to study the respective markets and the characteristics of the products, and not just their uses.

It is also advisable that distribution contracts address the issues of internet sales, use of online marketplaces, or other modes of online or combined distribution (omnichannel, for instance). Generally, these modes of distribution are not a part of the agreement that defines a particular territory. The use of social media, or other platforms, as an instrument to promote the sales should also be expressly dealt with in the contract. These usually involve the use of a trademark belonging to the manufacturer, and compliance with its internal communication and brand policies.

Minimum turnover clauses in Spain

According to article 1255 of the Spanish Civil Code, parties are free to decide the clauses they may deem as convenient, provided they respect the law. Minimum turnover clauses, are therefore, accepted and valid. However, article 1256 states that the validity and enforcement of an agreement cannot be left to the will of one of the parties and, for that reason, a clause that permits the supplier to make a unilateral decision on minimum turnover requirements from time to time (for example, on a yearly basis) will not be valid.

The minimum turnover will usually be considered an obligation to the distributor and, for that reason, failure to meet the agreed minimum turnover may be considered a breach of the contract, and a termination without notice may be possible.

This clause should be considered by courts keeping in mind not only what parties had agreed, but also the market conditions, supplier activities, products, prices, and reasonability and fairness.

In fact, the Spanish Supreme Court has held that a minimum turnover that is not reasonable considering the targets and turnovers of previous years cannot be accepted. Therefore, a termination by the supplier based on such an unreasonable minimum turnover clause is to be considered a unilateral termination without reason.

Premature termination by the supplier for non-attainment of the agreed minimum turnover by the distributor is accepted in Spain. Nevertheless, when there are reasons other than the distributor’s lack of activity, such as market conditions or the bad faith of the supplier, this principle will be balanced by courts. In fact, previous breaches of the contract by the supplier and his lack of performance have been considered sufficient to justify the failure to achieve the minimum turnover. This has been the case when a manufacturer appointed a second distributor in breach of the exclusivity agreement, in case of direct sales by the supplier, and when there were delays to supply goods to the distributor.

Generally, these clauses cannot be implied, and need to be clearly and expressly accepted by the parties. On the other hand, and as mentioned hereinabove, the figures cannot be decided, imposed, or amended unilaterally by the manufacturer. Parties can, nevertheless, agree to any amendments by reference to objective indexes. For instance, it is common to agree to a certain minimum turnover target for the first year, and then increase the figure annually according to the General Price Index annually approved by the National Institute for Statistics.

Distribution agreement termination in Spain

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.

Spain - Goodwill (clientele) indemnity for termination of distribution agreements

As we have previously mentioned, distribution agreements have no specific regulation in Spain. Therefore, there are no legal regulations on clientele indemnity or compensation for termination of distribution agreements.

Nevertheless, jurisprudence in Spain has frequently recognised goodwill compensation to the distributor.

The general admitted and confirmed case-law recognises this goodwill (clientele) compensation as remuneration for the activity of the distributor, and by analogical application of the Agency Act (article 28). These principles consider the compensation based on the idea of Agency regulations, and because the economic and social similarities in the nature of both contracts. The “clientele” is considered a common asset benefitting both the manufacturer and the distributor and, for this reason, the compensation is considered an additional remuneration for the activities already done but not still completely compensated for during the life of the agreement.

Nevertheless, the Supreme Court has settled that it is not correct to apply the analogy of Article 28 of the Agency Act to distribution contracts without taking into account the circumstances between the supplier and the distributor, and the special characteristics of the market. This has to be done when it is proved that the link between the supplier and the distributor is similar to the one with an agent.

This compensation has been refused in certain cases, for instance, when the distributor was not the sole distributor, when the distribution was not exclusive, or by requiring an evidence on the identity of reason between the agency agreement and the distributorship one.

Supreme Court has considered, in any case, that goodwill indemnity does not apply to distribution agreements automatically only by virtue of termination of the contract. In order to obtain the compensation, it is necessary to fulfil the same conditions for goodwill (clientele) compensation as required in agency agreements: that the distributor has increased the number of clients or increased the sales to the existing ones, that the supplier could still benefit from the clientele created by the distributor, it is a reasonable claim under the circumstances that this clientele is incorporated to the goodwill of the supplier. The aforementioned has to be proved by the distributor as a “reasonable forecast” of the probable conduct of the clientele at the time of termination.

On the other hand, considering the lack of specific regulations that make this compensation mandatory (and as a difference to what happens with Agency Agreements), parties in a Distribution contract are free to exclude the goodwill compensation. In order to be valid this exclusion should be clearly agreed.

The requirements to consider the circumstances of this compensation similar to the agency one:

  • the relationship between parties should be stable;
  • the distribution agreement of definite or indefinite duration has been terminated;
  • the distributor is able to prove that he has procured new clients for the supplier, or increased the sales volumes to the existent clientele;
  • the distributor activity can continue provide substantial benefits to the supplier. Also in this case, the clientele and the future substantial benefits for the supplier have to be proved by the distributor, and this should not merely be consequence of the reputation of the supplier and the brand. Accordingly, in order to determine the compensation, courts must consider all the circumstances, particularly the participation or not of the distributor in a distribution network, or the absence of exclusivity in the relationship;
  • that compensation will be considered fair due to the existence of competition limitation clauses, loss of margins, or other circumstances;
  • in some cases, it may be a requirement that the distributor must have been integrated in the distribution network of the supplier; and
  • that there was no breach of contract by the distributor, or that the agreement was not terminated or transferred by the distributor.

For calculation of the compensation, the method used for agency agreements can also be applied to distribution agreements. In distribution agreements, however, there is no “remuneration” to the distributor as in an agency regulationship. A distributor’s remuneration is in the form of profits made, from the difference in the purchase and resale price of the goods.

There is no minimum or maximum amount of compensation provided by law. This depends on the specific facts and circumstances of each case, as considered by the courts. Nevertheless, the courts consider the maximum goodwill compensation to be equal to the maximum compensation provided for in Agency agreements (the yearly average of the sums perceived during the last five years, or the entire duration of agreements that are less than five years).

If a contract is silent on the issue of the goodwill compensation, the courts will, most likely, determine an amount that is reasonable according to the following criteria- Special circumstances of each particular case, duration, exclusivity clauses, the importance of the distribution activity by the distributor, the direct relationship between the distributor and the final clients, the number of clients that could still provide benefits to the supplier, the market; and also the quality of products, speed of the replacements or commercial warranties, reduction of sales, the prestige of the brand/products, loyalty of clients, advertising by the manufacturer.

Courts are free to take into account such circumstances and the evidence presented by the parties, and will decide the amount according to the circumstances, considering the maximum limit mentioned in Article 28 of the Agency Act.

This maximum limit is typically set at one year of “remunerations” perceived by the distributor, calculated as an average of the previous five years (or shorter period if the agreement lasted for less than five years). These “remunerations” in the distribution agreements are the “margins”. At this time, the jurisprudence of the Supreme Court seems to have evolved from initially considered “gross margins” (the difference between purchase and resale price), to now considering “net margins” (the same difference, minus some general expenses of the distributor). These figures are to be proved by the Distributor.

The time-limit for claiming this compensation is five years; and Article 31 of Agency Act providing for one year as time-limit to claim compensation in agency agreements, does not apply.

The Acquisition of a local distributor

When appointing a distributor in Spain, the first move is usually to look for someone with enough relevant experience in the market, region, in the specific way of distribution required.

There is a natural tendency for foreign manufacturers to incorporate a local company, probably as a second step, sometimes with the local distributor previously appointed, or independently after terminating the distributor relationship. This depend on the manufacturer’s strategy for the market, the knowledge the manufacturer has acquired, and on other strategic alliances with local partners.

The transition from having an appointed distributor to becoming a fully or partially owned company should be carefully considered, if possible, from the time of entering into the market. This transition is usually a source of conflicts that may include compensations, corporation issues, and future complications.

Distribution agreements and trademark protection in Spain

No special license agreement is necessary for the distributor to use the trademark in the context of a distribution agreement. Nevertheless, in order to oppose the use of the trademarks by third parties , the license should be registered at the Trademarks Registry. Generally, a trademark belongs to the person registered as the owner with the Trademarks Registry; so it is important for the owner of the trademark to have it registered in Spain in order to be protected, and prevent the distributor from registering it. It is advisable to register the trademark before entering into any relationship with a distributor.

Reservation of Title in sales agreement under Spanish law

In a distribution contract under Spanish law, the reservation of title in favour of a supplier, for products purchased by the distributor, is considered a valid agreement between the parties. This reservation of title is usually valid until the distributor has completely paid the price and other applicable expenses or taxes. Nevertheless, the clause is not, by itself, complete because in order to be protected under the reservation of title clause, it is necessary to register it with the Registry of Term Sales in order to be effective with third parties.

Product liability under Spanish regulations

Royal Legislative Decree 1/2007 on consumer protection generally establishes the principle of liability of manufacturers and importers, for damages caused by products they respectively manufacture or import, and limitation of liability is not acceptable. There are, nevertheless, some exceptions to this general liability. For instance, when the product has not been put into circulation, the defect did not exist in the product at the moment of the putting into circulation, or existed because it was manufactured according to the compulsory applicable rules, or the product was not manufactured for sale or distribution. In addition, the responsibility will be reduced or even cancelled if the damages were caused due to the actions of the person suffering the damage, or their legal representative.

How to deal with Data protection regulations in distribution agreements

This field has its own regulations that go beyond the distribution relationship and are of utmost importance. In general terms, distributors are independent entrepreneurs and therefore, are governed and obligated by data protection rules like everyone else. In principle, information and data collected by the distributor is not collected by the manufacturer, and should be treated according to the applicable rules. The situation may be different if the distributor is a company owned by the manufacturer. In this case, although the companies are different, the Data Protection Policy could be organized as a part of the Group strategy.

Distribution agreements in Spain - Applicable law

In general terms parties to a distribution contract are free to submit it to a foreign legislation, and only permits its exclusion when other jurisdiction is applicable according to the following principles.

The foreign law will be applicable when expressly agreed by the parties, provided there is some connection with the operation agreed. In the absence of such an agreement, the applicable law shall be the law applicable commonly to the parties, one of their common residence, or where the contract was signed.

Principles of the Rome Convention 1980 are also applicable in case parties belong to countries affected by it.

While it is possible to submit an agreement to a foreign law, a problem could arise in order to prove its contents, enforceability, and application in a judicial proceeding before a Spanish Court. Evidence for the foregoing has to be provided by the party that invokes the foreign law and, if the contract stipulates a foreign law to be applicable but the evidence is insufficient, the Court will use the Spanish law to solve the conflict.

Distribution agreements in Spain - Jurisdiction and arbitration

Parties in a distribution agreement can contractually agree to any competent jurisdiction to settle their disputes. Spanish Courts do not have exclusive jurisdiction to settle disputes concerning distributors who carry out their activity in Spain.

The validity of the choice of the parties to submit disputes to a Court of a EU member state (with the exception of Denmark) is ruled by Article 25 of the Regulation 1215/2012.

Spanish law does not have rules about the validity of a clause excluding the Spanish jurisdiction and submitting the jurisdiction to a foreign Court not belonging to an EU member State. Civil courts should usually desist from judging, or a party could ask the court to desist, in cases of lack of international competence. The efficacy of such a clause depends on how expressly and clearly it is drafted.

Arbitration is also possible for distribution agreements. New York Convention on the recognition and enforcement of Arbitral Awards (1958) signed in 29 April 1977. Spanish Arbitration Act (60/2003) permits the settlement of disputes by arbitration. This includes the disputes related to the interpretation and enforcement of distribution agreements. This includes international arbitrations, and in case of an express submission to arbitration, Spanish Courts should refuse jurisdiction or can be invoked by a party.

Parties are also free to decide their disputes under the distribution agreements through mediation. Spanish Act 5/2012 on civil and commercial mediation can be used as the legal framework, and the agreement reached can be formalized before a public notary and rendered enforceable.

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