Principles of European Law on Commercial Agency, Franchise and Distribution Agreements.

Fabio Bortolotti | EU | 2005-10-04

Fabio Bortolotti

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General remarks. A main problem of these principles is that they try to set common rules for contracts that are substantially different, without making the necessary distinctions. In fact the contracts covered are: agency, franchising, exclusive distribution, selective distribution and exclusive supply, which have rather different economic functions and where the parties have rather different needs. So for example the need for pre-contractual information, which is justified for franchising contracts (where the position of the potential franchisee is near to that of a consumer), does not exist for an exclusive importer who will be adequately protected by the general rules on mistake, fraud, etc.

The common rules. Chapter 1 contains a number of general provisions applicable to all the contracts at issue (agency, franchising, distribution). An interesting issue is that of the notice period for terminating contracts concluded for an indefinite period. Article 1:302(3) introduces – for all distribution contracts – the presumption that a notice period of one month for each year of duration of the contract with a maximum of 36 months is to be considered reasonable. This period is not the mandatory minimum period which is limited to six months, but it is said later (Article 1:303) that the aggrieved party will be entitled to damages calculated on the ‘reasonable’ period, which means that the terminated party will be able to claim exorbitant amounts in case of termination.

A further surprising principle is contained in Article 1:305 which introduces in general terms, for all types of distribution contracts, a goodwill indemnity. The indemnity is due only if a party has significantly increased the other party’s volume of business, which would mean – according to the commentary under such Article – that it would have little application in the context of franchising and exclusive distribution, where the customers are mainly attracted by the image of the franchisor or the supplier. However, this interpretation is not supported by the wording of Article 1:305 which seems to cover any situation where the distributor/franchisee has increased the sales of the products. This would imply the introduction of a substantial additional burden upon franchisors and suppliers, with a substantial increase of the cost of dealing with European counterparts.

Agency contract. It is rather surprising that the drafters have forgotten to mention one of the main obligations of the agent, i.e. the obligation not to represent competing products or, at least, the obligation to ‘look after his principal’s interests’ mentioned in the EC directive 86/653. Such obligation is normally interpreted to include the prohibition of promoting the goods of competitors of the principal.

While such an essential issue is missing, there is a clause (Article 2:204) which obliges the agent to ‘maintain proper accounts relating to the contracts negotiated or concluded on behalf of the principal’. When reading this provision one gets the impression that the drafters have never seen a commercial agent. An agent normally transmits purchase orders to the principal and need not to keep any accounting about this activity; he may undertake the obligation to inform the principal about the customers he visits, but his accounting will regard the commissions paid to him by the principal.

As regards the entitlement to commission and its payment, instead of improving the provisions of the EC directive, Articles 2:301-2:306 mix up issues which should be dealt with separately and substantially worsen the previous text.

As regards the goodwill indemnity Article 2:312 tries to improve the ‘German’ system of calculation contained in Article 17(2)(a) of the 1986 directive by directly fixing a calculation method based on the German judicial experience, but without success. A quick reading of the provision shows that, before transposing the rather sophisticated method of calculation worked out by the German courts in two short paragraphs, the drafters should have studied in-depth the characteristics of such systems as well as possible alternatives. It is in my opinion a mistake to copy the ‘German’ system of calculation, which is needlessly complicated; but, if one decides to adopt it, this should at least be done through clear and understandable clauses, which can be easily applied by the parties and the courts.

Franchising.As regards franchising, the general definition only covers product franchising (franchising for the sale of products) and not the service franchising, which means that the latter (franchising of restaurants, hotels, etc.) would remain outside such regulation.

It should also be noted that a narrow notion of franchising (implying necessarily the provision of commercial know-how: see Article 3:202) has been chosen. This means that franchising contracts based exclusively on the image and trade signs of the franchisor (without supply of know-how) will fall under the more general notion of distribution agreements and thus under the rules of the chapter on distribution contracts.

The clause on pre-contractual information (Article 3:102) is far from being complete. This is easily shown if one compares it with the Unidroit model law. Instead of extending ‘disclosure’ obligations outside the franchise contract, the drafters should have worked out more detailed rules for the franchising contract, where they are needed.

As regards the franchisor’s obligations, Section 2 contains a number of provisions which are worded very generally and may widen excessively the responsibilities of the franchisor, such as the obligation to grant the franchisee ‘a right to use the intellectual property rights to the extent necessary to operate the franchise business’ (Article 3:201), the obligation to ‘provide the franchisee with assistance in the form of training courses, guidance and advice in so far as necessary for the operation of the franchise business, without additional charge for the franchisee’ (Article 3:203), the obligation to ‘make reasonable efforts to promote and maintain the reputation of the franchising network’, and in particular to design and coordinate advertising campaigns without additional charge to the franchisee (Article 3:207).

In the meantime, the basic obligation of the franchisee to refrain from selling competing products and from participating in competing networks has been forgotten.

As regards distribution contracts, Chapter 4 refers to several, rather different contracts, which should actually be treated separately in order to be able to answer to the specific problems they raise. However, this would require a thorough knowledge of the actual contents and critical issues of the various contracts, which the drafters of the project apparently did not have.

This is probably the reason why the few rules contained in this chapter are vague and do not cover the typical issues of such contracts like, for example, exclusivity, non-competition, minimum turnover, stock, etc., for the exclusive distribution contracts; maximum duration, sale of competing products, etc. for exclusive purchase contracts (like those in the beer sector); criteria for admission to the network, equal treatment, obligation not to sell outside the network, etc. for selective distribution contracts.

Conclusion. It would certainly be useful to have European rules on agency, franchising and various forms of other distribution contracts. However, if the members States have been unable to state rules of this type (with only few exceptions), except for the issues covered by the directive on commercial agency, this is mainly due to the difficulty of enucleating the actual points to be regulated on one side and of finding solutions which can be accepted by all the parties involved on the other side. Such a goal can only be achieved through a close cooperation between academics and the business world, which has been totally absent in this case.

Fabio Bortolotti, Chair IDI

* Text provided by Gustav Breiter, IDI Expert for Austria.

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