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FINLAND: An interesting case-law on a cooperation agreement.

The Finnish Supreme Court ruled on 3 May 2018 (KKO 2018:37) on the formation and termination of a long-term cooperation agreement by referring to the provisions of the Draft Common Frame of Reference (DCFR) which might give an extensive protection in the case of termination.

Lauri RAILAS - 16.07.18
Country expert - IDARB Arbitrator

Although the cooperation agreement was not a pure distribution, franchise or agency contract, the court expressly referred to such contracts, their termination and damages in the case of termination period which is not of reasonable length. It may therefore constitute a precedent especially for distributorship and franchising contracts for which there is no legislation in Finland. The approach of Finnish courts would seem to be different from that of the courts in other Nordic countries, as recently reported by Magnus Nerström for the part of Sweden.    

                                                                                   

DETAILS

The Finnish coffee distillery Meira Oy had started to order dispensable (throwaway) cups with its trademark printed on them from Suomen Kerta Oy in 2008. The amounts of cups ordered and produced each time were in hundreds of thousands. In August 2011, Meira terminated the relationship by giving Suomen Kerta a four-month period to sell its stock of cups away. The time was not sufficient, and a large part of the stock had become redundant. Suomen Kerta claimed damages.

Meira stated that there was no long-term contract in place. The court found, based on precedents, that the production and distribution contract for throwaway cups with an indefinite duration could be construed on the real actions and behavior of the parties without express declarations of will to construe the contract.

The court then ruled on the termination. Contracts with an indefinite duration may be terminated even without an express provision about it. In terminating the agreements, the parties must nevertheless consider each other´s interests. A contract may be terminated after the expiration of a reasonable period (KKO 2010:69).

In assessing, what constitutes a reasonable period, the court referred to the Finnish Commercial Agency Act 1992 and, more interestingly, to the Draft Common Frame of Reference 2008, Book IV Part E (Commercial agency, franchise or distributorship) which provides in 2:302 as follows:    

    

IV. E. – 2:302: Contract for an indefinite period

(1) Either party to a contract for an indefinite period may terminate the contractual relationship by giving notice to the other.

(2) If the notice provides for termination after a period of reasonable length no damages are payable under IV. E. – 2:303 (Damages for termination with inadequate notice). If the notice provides for immediate termination or termination after a period which is not of reasonable length damages are payable under that Article.

(3) Whether a period of notice is of reasonable length depends, among other factors, on: (a) the time the contractual relationship has lasted; (b) reasonable investments made; (c) the time it will take to find a reasonable alternative; and (d) usages.

(4) A period of notice of one month for each year during which the contractual relationship has lasted, with a maximum of 36 months, is presumed to be reasonable.

 

The court found that four months´ notice was sufficient considering the circumstances. The court did not therefore award damages to be paid to Suomen Kerta for the stock of unsold cups.

The court reached its judgment by vote three against two. The two dissenting justices did not disagree on the length of the termination period but stressed the need to compensate the loss of Suomen Kerta, again referring to the DCFR and agency laws. The DCFR states as follows:

IV. E. – 2:306: Stock, spare parts and materials If the contract is avoided, or the contractual relationship terminated, by either party, the party whose products are being brought on to the market must repurchase the other party’s remaining stock, spare parts and materials at a reasonable price, unless the other party can reasonably resell them.

The dissenting justices also made reference to section 18 of the Finnish Act on Commercial Agency stating that a commercial agent has a right to be indemnified for the costs that the due performance of the agency contract has required. The dissenting justices also referred to Directive (86/653/EEC) on commercial agents and its Article 17 para. 3 which states as follows:

 

3.   The commercial agent shall be entitled to compensation for the damage he suffers as a result of the termination of his relations with the principal.

Such damage shall be deemed to occur particularly when the termination takes place in circumstances:

— depriving the commercial agent of the commission which proper performance of the agency contract would have procured him whilst providing the principal with substantial benefits linked to the commercial agent's activities,

— and/or which have not enabled the commercial agent to amortize the costs and expenses that he had incurred for the performance of the agency contract on the principal's advice.

 

Finally, the dissenting justices referred to section 8 para 4 of the Finnish Agency Act, which states that the principal must inform the agent without undue delay if the principal foresees that the activity envisaged in the agency contract is considerably less extensive than the agent could reasonably expect. The dissenting justices mentioned the duty of loyalty, which is the Nordic equivalent for the doctrine of good faith and fair dealing found e.g. in the Unidroit Principles.

The judgment of the Finnish Supreme Court is relevant because it again states how contractual relationships may be established without a written contract, how contracts of indefinite length are terminated and what rights the parties have in the case of termination. The references to the DCFR in the context of defining a reasonable termination period are a novelty in Finnish law. In this case, the length of the contractual relationship had been only between three or four years. It remains to be seen, whether contractual relationships of for example 15-20 years with substantial investments made by the distributor for whom it is difficult to find a reasonable alternative business, would lead to longer termination periods.

The reasoning of the court shows that commercial agency law is still used ex analogia.  Reference to the duty of loyalty, although only made by the dissenting justices, should also be observed since contracts of agency, franchising or distributorship are no different from other contracts in this sense.   

 

Lauri Railas, IDI agency & distribution country expert for Finland

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