Distribution Agreements in Switzerland

Distribution agreements constitute “framework agreements”, which govern the distribution relationship between a supplier and a distributor. Unlike commercial agents, distributors buy products from a supplier – who may be the manufacturer, but also a wholesaler – in their own name and for their own account. Distributors then resell such goods and services (hereinafter referred as “products”) to customers located in a specified territory, whereby such customers may be retailers, but also end customers (for example consumers or undertakings using the products in their own businesses).

Distribution agreements may exist in a wide range of variations and bear different titles. For example, they may be limited to the buying and reselling of products to specific customer groups. However, distribution agreements may also impose numerous obligations on distributors and lead to a strong integration of distributors into the supplier’s distribution organisation (for example in case of selective distribution agreements), in which case distributors may find themselves in a similar position as commercial agents or franchisees.

Distribution agreements can be divided in subcategories. In selective distribution agreements, a supplier undertakes to sell products only to authorised distributors selected on the basis of specified criteria, whereby these authorized distributors are obliged not to resell the products to unauthorised distributors. In other words, selective distribution agreements result in a “closed” group of distributors, selected on the basis of specified criteria, whereby leaks to unauthorized distributors shall be avoided. Selective distribution agreements often pertain to luxury products. In sole or exclusive distribution agreements, suppliers assign different territories or customer groups to different distributors, which are exclusively responsible for the assigned territories or customer groups (within the borders of competition law; see question 3) – often even to the exclusion of the supplier.

Distribution agreements are not specifically governed by Swiss statutory law. They are so-called “innominate contracts”. Therefore, the general rules of Swiss contract law, namely the Swiss Code of Obligations (“CO”), apply.

In addition, some provisions governing other types of contracts may apply by analogy. For instance, some of the provisions in Article 418a et seqq. CO regarding commercial agency agreement may apply by analogy to distribution agreements, for example with regard to goodwill indemnities (Article 418u CO; see question 6).

With regard to the contracts of sale concluded between the supplier and the distributor under the umbrella of a distribution agreement, Articles 184 et seqq. CO regarding contracts of sale apply. In case of international sales of goods, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) may apply.

In addition to the rules contained in the CO and CISG, the Swiss Cartel Act, Swiss Unfair Competition Act, and further laws also govern rights and obligations of the parties to a distribution agreement.

With regard to the application of the Swiss Cartel Act, it is helpful to refer to the Notice on Vertical Restraints and the Explanatory Guidelines of the Swiss Competition Commission . The Notice and the Explanatory Guidelines are strongly inspired by the European Regulation 330/2010 on the application of Article 101(3) TFEU to categories of vertical agreements and concerted practices and the Guidelines on Vertical Restraints (2010/C 130/01) of the European Commission. In principle, European competition law rules apply in Switzerland almost as if they were Swiss; what is prohibited in the EU is most likely also prohibited in Switzerland, and what is permissible under EU competition law should also not raise any concerns in Switzerland.

Under Swiss law, distribution agreements can be concluded in writing, orally, or even tacitly.

The tacit conclusion of a distribution agreement is sometimes asserted by (alleged) distributors on the basis of long-term buyer-vendor relationships, for example in cases where an (alleged) distributor was de facto the sole reseller of a vendor’s products within a specific territory for a certain period of time and collaborated with the vendor for the marketing of the products. Nonetheless, Swiss courts tend to be rather hesitant in affirming the existence of tacitly concluded distribution agreements.

For evidentiary purposes and in view of the fact that distribution agreements are not specifically governed by Swiss statutory law, it is advisable to conclude a comprehensive written distribution agreement. Such comprehensive written distribution agreement should at least govern all essential elements of the distribution relationship, for example:

• the products covered by the distribution agreement (including rules as to how the list of products can be amended);
• the territories and/or customer groups assigned to the distributor (including, for example, a potential extension of such territories in case the distributor achieves certain targets);
• any exclusivity granted to the distributor, including any exceptions therefrom (for example if the supplier reserves the right to serve certain key accounts located in the exclusive territory of the distributor by itself or to make online sales into the territory of the distributor);
• the prices and other terms (for example periodic order forecast, delivery lead times, applicable Incoterms®, rights and obligations in case of defective periods, warranty periods, payment terms, retention of title etc.) in connection with the supply of products from the supplier to the distributor (including rules as to how the prices can be changed and other terms can be amended);
• minimum turnovers (including rules as to their adaptation) and the consequences in case of a non-achievement of such minimum turnovers (see question 4);
• marketing and sales promotion obligations of the distributor (for example minimum budget to be invested in the marketing and sales staff to be hired by the distributor for the marketing of the products) as well as support provided by the supplier;
• provisions of after sales services by the supplier or distributor to (end) customers;
• minimum stock levels to be complied with by the distributor;
• reporting obligations of the distributor as well as audit and inspection rights of the supplier;
• contractual and post-contractual confidentiality obligations;
• intellectual property (IP) related provisions (for example a prohibition of the registration of the supplier’s name or trademarks by the distributor as a domain name, trademark, business name etc.);
• exclusive purchasing obligations as well as contractual and post-contractual non-compete obligations (in line with Swiss competition law rules);
• insurance obligations and limitations of liability;
• data protection related obligations (in particular if the distributor is obliged to share personal data with the supplier);
• regulatory matters (for example obligation to obtain and maintain all required regulatory approvals and obligations with regard to a potential product recall);
• term of the distribution agreement (including, for example, notice periods for ordinary terminations and rules regarding extraordinary terminations) and consequences of the termination thereof (for example, right of the supplier to purchase the remaining stock from the distributor; see question 5);
• applicable law and choice of jurisdiction respectively arbitration (see questions 8 and 9);
• in case of selective distribution: obligation of the (authorised) distributor not to sell the products to unauthorised distributors.

When negotiating a distribution agreement, the parties should always act in accordance with the principle of good faith. Otherwise they risk becoming liable to the other party. For further information, please refer to the separate article on the liability for termination of contract negotiations on the Legalmondo blog.

There are no distribution-specific registration obligations. Ordinary registration obligations apply. For example, distributors located in Switzerland whose turnover exceeds CHF 100,000 per year generally have to register with the commercial register, even if they do not make use of a legal entity. Furthermore, distributors whose turnover exceeds the same threshold are usually liable to Value Added Tax (VAT), and must therefore register with the Federal Tax Administration.

Swiss Distribution, the former Swiss Franchise Association, has published a Code of Conduct which binds members of Swiss Distribution. The Code of Conduct contains, amongst others, provisions regarding pre-contractual disclosure, the selection of distributors or the minimum content of distribution agreements. Membership with Swiss Distribution is voluntary.

Suppliers may decide to grant distributors certain exclusivity rights. Such rights often relate to specific territories (for example states), in which a distributor enjoys exclusivity, meaning that the supplier will not appoint any other distributors for the distribution of the products in the same territories. The distribution agreement should explicitly state whether such exclusivity rights of the distributor also prohibit the supplier from directly selling products to customers located in the exclusive territories of the distributor.

If territories are assigned to distributors on an exclusive basis, distributors can be prohibited from actively selling products outside their territories only, i.e., from actively approaching customers located in other territories. By contrast, distributors must be free to passively sell products outside their “own” territories, meaning that they must be able to respond to unsolicited requests from customers located outside the territories assigned to the distributor.

Prohibitions of passive sales into specific territories are deemed to eliminate effective competition in accordance with Article 5 para. 4 of the Swiss Cartel Act and are vigorously prosecuted by the Swiss Competition Commission in case the Swiss market is concerned. Such unlawful prohibitions frequently result in substantial fines of up to 10% of the turnover achieved in Switzerland in the preceding three financial years (Article 49a Cartel Act).

Contrary to EU competition law, no direct fines can be imposed under the Swiss Cartel Act in case of a prohibition of passive sales to certain customer groups. Nonetheless, such prohibitions are regularly unlawful under Swiss law as well, meaning that distributors should also be free to respond to unsolicited requests from customers exclusively assigned to another distributor or reserved for the supplier.

From the supplier's perspective, it is advisable to state in the distribution agreement that exclusivity rights shall lapse once notice has been given by one of the parties to the distribution agreement (see questions 5). Furthermore, it may also be helpful to state that exclusivity rights shall end in case the distributor does not achieve certain minimum turnovers (see question 4).

Minimum turnover clauses are admissible under Swiss law and frequently incorporated into distribution agreements.

Minimum turnover clauses may exist in different forms. Often, parties stipulate minimum purchase quantities in distribution agreements, whereby a non-achievement of such minimum purchase quantities can amount to a breach of the distribution agreement. Parties to distribution agreement may, however, also agree on minimum sales volumes, i.e., minimum sales by the distributor to its own customers. In any case, distribution agreements should clearly govern the consequences of a non-achievement of minimum turnovers (for example an automatic loss of the exclusivity, the existence of extraordinary termination rights on the part of the supplier (see question 5), damage claims etc.).

It is also possible to stipulate multi-tiered turnover clauses. For instance, a distribution agreement may stipulate minimum turnovers, where a non-achievement amounts to a breach of the agreement with the potential consequences mentioned above, but also less strict turnover targets, whose non-achievement does not qualify as a breach of the agreement, but may nonetheless have a negative influence on the distributor (for example higher prices for the supply of products by the supplier to the distributor, a loss of exclusivity in case of repeated non-achievement of turnover targets etc.).

Since distribution agreements are usually concluded for a rather long period of time, it is advisable to provide for a fallback solution in case that supplier and the distributor cannot agree on new minimum turnovers or turnover targets. For instance, a distribution agreement may state that the minimum turnover of the preceding year shall be increased by a certain percentage and deemed to be the new minimum turnover in case the parties cannot agree on a new minimum turnover.

Under Swiss law, distribution agreements may be entered into for a fixed or an indefinite period of time.

If a distribution agreement is concluded for a fixed period of time or its term is limited by virtue of its purpose (for example, by the nature of the products), it ends without notice upon the expiry of that term.

If a distribution agreement is concluded for an indefinite period of time, it may be terminated in accordance with the notice period set forth in the distribution agreement. In that regard, distribution agreements with a fixed term, but which are automatically extended respectively renewed if not terminated by any of the parties before the expiry of the fixed term, are also considered to be agreements concluded for an indefinite period of time.

In cases where distribution agreements do not stipulate the applicable notice period, the prevailing doctrine argues that Article 418q para. 1 CO regarding agency agreements applies by analogy in the first year of the distribution relationship, meaning that the distribution agreement can be terminated under observance of a one-month notice period, with effect as of the end of the subsequent calendar month. As from the second year of the distribution relationship, Article 546 CO regarding simple partnerships applies by analogy, so that the distribution relationship can be terminated by giving six months’ notice.

Both a distribution agreement concluded for a fixed or indefinite period of time may be terminated at any time with immediate effect for good cause. Good cause means that circumstances exist that render the continuation of the distribution relationship unacceptable for the terminating party. By way of example, the supplier may, for example, extraordinarily terminate the distribution relationship in case the distributor fails to pay the supply price to the supplier for the products on a lasting basis. On the other side, lasting violations of the distributor’s exclusivity rights by the supplier may give rise to an extraordinary termination right of the distributor. Parties may define "good cause" in the distribution agreement. This is particularly important if, for example, the non-achievement of certain minimum turnovers (see question 4) shall trigger an extraordinary termination right (with immediate effect or under observance of a relatively short notice period). Having said that, such definition only serves as an indication of what the parties deem to be unacceptable, and the courts will still have the authority to accept other non-enumerated circumstances as a good cause for a termination with immediate effect. With the exception of severe cases, the party that wishes to terminate a distribution agreement with immediate effect is required to notify the other party and request it to rectify an ongoing breach prior to giving notice of termination with immediate effect. Once the requirements for an extraordinary termination are met, notice of termination should be given without delay, ideally within a few days. Otherwise, the extraordinary termination may be considered to be late and therefore ineffective.

An unjustified termination of a distribution agreement with immediate effect is null and void, unless the distribution agreement states otherwise. Therefore, the party who received an unjustified termination with immediate effect may require the terminating party to continue complying with the obligations under the distribution agreement (for example, the supplier’s obligation to supply products to the distributor). If the terminating party refuses to do so, the other party may apply for a preliminary injunction.

Since ordinary and extraordinary terminations of distribution relationships are a frequent source of disputes, it is strongly recommended to clearly govern the consequences of the termination in the distribution agreement. For instance, it is usually in the interest of the supplier to state that the supplier has the right to purchase the remaining stock from the distributor at the end of the distribution relationship. Furthermore, since distributors are generally less committed to the distribution of products once notice has been given by either party, it is also helpful for the supplier to state that exclusivity shall automatically lapse during the notice period, so that a new distributor can become active or the supplier can vertically integrate the distribution activities as soon as feasible, without being restricted from doing so because of ongoing exclusivity rights of the former distributor.

For further reduction of the risk of disputes in connection with the termination of distribution agreements, the parties may also enter into termination or settlement agreements.

Article 418u CO entitles commercial agents to a goodwill indemnity (sometimes also referred to as "compensation for clientele") at the end of the agency relationship. The goodwill indemnity serves as a mean to compensate an agent for surrendering its customer base to the principal upon termination of the agency relationship.

The Swiss Supreme Court has decided in a leading case of 2008 concerning an exclusive distribution agreement that Article 418u CO may apply by analogy to distribution agreements. The assessment of whether a distributor is entitled to a goodwill indemnity consists of two stages: In the first stage, it is necessary to analyse whether the requirements stipulated by the Swiss Supreme Court for an analogous application of Article 418u CO to the distribution relationship at stake are met. If so, it must be analysed, in the second stage, whether all requirements for a goodwill indemnity set forth in Article 418u CO are fulfilled.

As to the first stage, an analogous application of Article 418u CO to distribution agreements requires that the distributor is, to a large extent, integrated into the supplier’s distribution organisation. Because of such strong integration, the distributor must find itself in an agent-like position, and dispose of limited economic autonomy only. The following criteria indicate a strong integration into the supplier's distribution organisation:

• minimum turnover clauses (see question 4);
• right of the supplier to unilaterally change prices for products;
• right of the supplier to unilaterally terminate the manufacturing of products;
• minimum marketing obligations;
• minimum stocks of products;
• reporting obligations;
• audit and inspection rights;
• post-contractual non-compete obligations.

If an analogous application of Article 418u CO can be affirmed, it must be analysed whether all the requirements for a goodwill indemnity set forth in Article 418u CO are met. In that second stage, the assessment resembles the test to be carried out for "normal" commercial agency relationships. The following four requirements must be met:

• the distributor must have considerably expanded the supplier’s customer base.
• considerable benefits must accrue to the supplier even after the end of the distribution relationship from business relations with customers acquired by the distributor.
• a goodwill indemnity must not be inequitable.
• the distribution relationship must not have ended for a reason attributable to the distributor.

Where Article 418u CO is applicable by analogy to a distribution relationship, and all the above-mentioned requirements for a goodwill indemnity are met, the indemnity payable to the distributor may amount up to the distributor’s net annual earnings from the distribution relationship. In such cases, the entitlement is mandatory and cannot be contractually excluded in advance.

For more detailed information, please refer to the article on goodwill indemnities on the Legalmondo blog.

Swiss law is very popular among parties to distribution agreements and, in particular, suppliers. Compared to many other laws, Swiss contract law is very liberal, especially with regard to distribution agreements. The principle "pacta sunt servanda" is of utmost importance under Swiss law, meaning that the content of a contract is binding on both parties, even if a contract is drafted in favour of one of the parties. It is very rare that Swiss contract law interferes with Business-to-Business ("B2B") relationships. One of the few exceptions concerning distribution agreements relates to the payment of a goodwill indemnity, which might be due even if it is excluded in the distribution agreement (see question 6). Because of the very liberal character of Swiss contract law, parties to distribution agreements often agree on the application of Swiss law, even in cases where no party is located in Switzerland and the agreement relates to a foreign territory.

The ordinary limitation period for contractual claims, including claims arising out of a distribution agreement, amount to ten years (Article 127 CO). This 10-year limitation period also applies to goodwill indemnities. Unlike the laws of other European countries, Swiss law does not stipulate that an entitlement to goodwill indemnity lapses if it is not asserted within a period of one year as from the end of the distribution relationship. For further information, please refer to the separate article on the revised Swiss statute of limitations on the Legalmondo blog.

In case of a distribution agreement with a relevant international nexus, the governing law must be determined in accordance with the Swiss Private International Law Act ("PILA"). An international nexus exists, in particular, if the supplier's seat is located in a country different from the distributor's seat country.

As can be seen in the following, the provisions in the PILA are, to a substantial extent, harmonized with the EU Regulation 593/2008 on the law applicable to contractual obligations (“Rome I Regulation"):

Article 116 PILA provides the parties to a distribution agreement with the possibility to choose the law governing the agreement. Such choice of law must be explicit by means of a clear choice of law clause in the agreement, or at least unambiguously evident from the terms of the agreement, or the circumstances.

The parties’ freedom to choose the governing law is, however, not unlimited. According to Articles 18 and 19 PILA, certain mandatory rules of countries other than the chosen one –be it Swiss or a foreign law – can apply notwithstanding the parties’ will. In this respect, there is legal uncertainly as to whether, for example, the entitlement to a goodwill indemnity pursuant to Article 418u CO and corresponding provisions from foreign laws might fall under Articles 18 und 19 PILA.

In the absence of a choice of law, the law of the state where the distributor has its place of business governs distribution relationships. This follows from Article 117 para. 3 PILA, whereby the distributor is to be considered as providing a service, and thus the characteristic obligation within a distribution relationship. From a supplier’s perspective, it is crucial to be aware of this rule. In case the distributor has its place of business in a country other than the country of the supplier, a supplier is well advised to include a clear choice of law clause in the distribution agreement, as otherwise the foreign distributor might benefit from its own law. From a Swiss law perspective, a choice of law will generally be valid, with the exception that specific mandatory rules of the law governing the distribution relationship in the absence of a choice of law might still apply.

In order to reinforce the effectiveness of a Swiss choice of law, it is generally advisable to couple such a provision with a clause stating that Swiss courts shall have exclusive jurisdiction for any disputes arising out of the distribution agreement (see question 9).

It is possible for disputes arising from an international distribution agreement to be submitted to the jurisdiction of foreign judicial courts or international arbitration.

The legal basis for an agreement on jurisdiction (prorogation) depends on whether or not one of the parties to a distribution agreement is domiciled in a member state of the Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters of 30 October 2007 ("Lugano Convention"), i.e., in a member state of the EU or EFTA (European Free Trade Association, with the exception of Liechtenstein). The Lugano Convention is, to a large extent, identical to European Brussels I Regulation.

In cases where one of the parties to a distribution agreement is domiciled in a member state of the Lugano Convention, Article 24 of the Lugano Convention allows for an agreement conferring jurisdiction to be concluded in various manners, in particular in writing or evidenced in writing or in a form which accords with practices which the parties have established between themselves. If none of the parties to a distribution agreement is domiciled in a member state of the Lugano Convention, Article 5 PILA applies. According to that provision, a choice of jurisdiction agreement may be made in writing, by telegram, telex, telecopier, or by any other means of communication that evidences the terms of the agreement by a text.

In the absence of a choice of jurisdiction agreement, jurisdiction for a dispute must be established in accordance with the Lugano Convention or, outside the scope of application of the Lugano Convention, the PILA. Under the Lugano Convention, an action may be brought in the state where the defendant is domiciled (Article 2 Lugano Convention). In addition, the courts of the place where the distributor performed its services are competent (Article 5 para. 1 Lugano Convention). Outside the scope of application of the Lugano Convention, Articles 2, 112 and 113 PILA lead, in essence, to the same courts as the Lugano Convention.

If a choice of jurisdiction clause or the statutory provisions refer to a Swiss municipality located in a canton with a commercial court (Zurich, Berne, Aargau or St. Gallen), the dispute will be adjudicated by a specialized commercial court. Commercial courts act as sole cantonal instances, whose judgements may be appealed before the Swiss Supreme Court only. In principle, the review of a judgement by the Swiss Supreme Court is limited to questions of law, but not questions of fact. Swiss court proceedings generally take place in one of the official languages, depending where the court seized is located. English proceedings are not yet possible.

As regards the submission of disputes arising from an international distribution agreement to international arbitration, this is generally possible. Switzerland is a very arbitration-friendly venue and party to the New York Convention. Article 177 para. 1 PILA states that all pecuniary claims may be submitted to arbitration. Therefore, it is worth considering including a proper arbitration clause in an international distribution agreement. It is often advisable to make use of a model clause from an arbitration institution, such as the model clause relating to the Swiss Rules of International Arbitration of the Swiss Chambers' Arbitration Institution.