Distribution - contracts in the Netherlands
Distribution agreements in the Netherlands
A common way for businesses, particularly exporters of goods, to enter new markets is to enter into an agreement with a distributor based in the foreign country. Dutch law on distribution agreements is relatively complex.
What is a distribution agreement under Dutch law?
A distributor purchases goods from the supplier and sells these on to third parties in his own name and for his own account. A distribution agreement must be distinguished from an agency agreement. Under an agency agreement the agent sells the product on behalf of and in the name of the principal. This difference has important implications for the relative rights, obligations and liabilities of the parties.
As is also the case with commercial agency contracts in the Netherlands, distribution agreements do not require to be in writing. Different from Dutch agency law, distribution agreements are not regulated by specific mandatory provisions in the Dutch Civil Code.
Exclusive, sole and non-exclusive distribution agreements under Dutch law
Distribution agreements may be either exclusive, sole or non-exclusive. Under an exclusive distribution agreement, the distributor will be exclusively authorised to sell the goods in a particular country or area.
Under a sole distributorship the supplier must not engage any other distributors in the relevant territory, but may engage in direct sales itself.
Exclusive distribution agreements usually include performance obligations for the distributor, for example a stipulation for minimum sales or proceeds per year.
Exclusive distribution agreements may also need to comply with European competition laws. A Dutch lawyer can advise you on making your agreement compatible with Dutch and European Law.
How are distribution agreements regulated under Dutch law?
Dutch law does not have a specific legal regime applying to distribution agreements. This means that the general law of contracts applies to distribution agreements.
The Dutch Civil Code is based on the principle of contractual freedom: suppliers and distributors are only bound by the rules they agreed to between themselves. However, there are some mandatory rules regarding distribution agreements. Most of these derive from competition rules.
There is no requirement of form for distribution agreements. This means that a distribution agreement can be concluded orally or, for example, through an exchange of emails or other communication.
Reasonableness and fairness under Dutch contract law
Despite the lack of specific legal provisions relating to distribution agreements, Dutch case law demonstrates a rather strict approach to a number of specific issues. The principle of “reasonableness and fairness” that permeates Dutch contract law demands that parties to a contract treat each other in a reasonable and fair way.
The principle of reasonableness and fairness “fills the gaps” where particular issues have not been explicitly provided for in the distribution agreement. In extreme cases a court may even set aside a provision in a contract if the consequences of strict adherence to such provision are deemed to be unacceptable on the basis of reasonableness and fairness.
Things to consider when drafting a distribution agreement under Dutch law
- Scope of the Agreement
- Performance Requirements
- Transfer of Risk
- Termination
Termination of a distribution agreement in the Netherlands
A distribution agreement, entered into for an indefinite period, can be terminated by the supplier if a reasonable notice period is observed. Reasonable notice periods for the termination of distribution agreements may vary between a period of a few months (if the agreement had run for a few years up to a period of three years (if the distribution agreement lasted a very long period). The Dutch courts will take into account the interest of the prejudiced distributor when deciding what notice period should is reasonable. Even when a reasonable notice period is given by the terminating supplier, the supplier may nevertheless be liable for damages flowing from the termination of the distribution agreement.
Damages for premature termination
Damage may include loss of profits due to premature termination, and, in certain circumstances, loss of return on investments made. Such investments need to have been made within the context of the distribution agreement, whilst the distributor could have reasonably expected to recover these investments if the distributorship would have continued uninterrupted.
If the termination has taken place with observance of a reasonable notice period, then in most cases there will be no liability of the supplier to compensate future lost profits of the distributor.
Under Dutch law, liability for investments that could not have been recovered arises only where the distributor made the investments with a reasonable and justified expectation that the distribution agreement would not be interrupted by termination. Examples include where a supplier indicates that the distribution agreement will continue for a long term, where supplier encourages the distributor to make investments, or where the supplier does not seek to prevent the distributor from making investments whilst he already had the intention to terminate, are relevant circumstances in judging the liability of the terminating supplier. If a reasonable notice period has not been observed in the termination of a distribution agreement under Dutch law, the terminating supplier can be held liable for damages of the distributor for both lost profits and investments not recovered. Under Dutch law, lost profits are calculated as from the date of premature termination as the lost turnover minus the costs that are avoided over the remaining period with the addition of the costs to be incurred that cannot be avoided, in connection with the terminated distribution contract.
Goodwill compensation upon termination of a distribution agreement under Dutch law
Under Dutch law, the terminating supplier is not specifically held to compensate the distributor for the goodwill he built up during the course of the distribution agreement.