Termination of Distribution Agreements and its Consequences


I. Introduction

 

Distributorship agreements are not specifically regulated under Turkish law. Although not specifically regulated, distributorship agreements can be executed within the context of the "freedom of contract" principle. The characteristics of distributorship agreements are similar with agency agreements. As a consequence of this, it is generally accepted that the Turkish Commercial Code (the "TCC") provisions relating to agency agreements should also be applied to distributorship agreements, by way of analogy.

In the absence of a definition in the law, scholars have defined "distributorship" agreements as follows:
"... a continuous framework agreement governing the legal relationship between a producer (or exporter/importer depending on the circumstances) and the distributor, whereby the producer undertakes to supply the products to the distributor, who in turn, will sell these products within a certain territory, acting in its own name to increase the sales of these products within that territory."

Distribution agreements may be categorised as either exclusive or non-exclusive. In an exclusive distribution agreement, the supplier will grant to the distributor exclusivity over a particular territory and/or product line and/or sales channel.

 


II. Termination of the Distribution Agreements

 

Turkish legal practice provides six forms of termination for distribution contracts. These are; (i) mutual termination, (ii) ordinary termination (without cause) where a distribution relationship is established for an unlimited period of time, (iii) expiry, in case of a distribution relationship established for a limited period of time, (iv) termination for cause, (v) bankruptcy of either of the parties, (vi) death of distributor/suspension of his civil rights.

Bankruptcy is stated as a specific reason for the termination of the distribution agreements, however in the event distributor ceases its activities without bankruptcy this situation constitute a justified reason for the supplier to terminate the agreement.

As the provisions regarding agency agreements are applied to distributorship agreements by way of analogy, the general principle and process for termination of both types of agreements are almost identical. The general rule for the termination of both agency agreements and distributorship agreements executed for a definite term is that they will be automatically terminated at the end of their term. They can also be terminated with just cause, before their expiry date.

As for the termination of agreements executed for an indefinite term, the termination procedure will differ, depending on the reason for termination. First and foremost, the termination must be made in writing and in accordance with Article 18 of the TCC. Paragraph 3 of this article provides that termination of any kind of agreement signed by and between merchants must be terminated with a notification to be sent through notary public, a registered letter, via telegram or e-mail signed with secured and registered electronic signature.

Secondly, the reason of the termination must be taken into account when terminating a distributorship agreement. In the presence of a just cause, such as the distributor's breach of contract, the distributor's actions constituting unfair competition etc., the termination will have the immediate effect; whereas, in the absence of just cause, the termination requires a notice period. Under the TCC, the notice period for terminating an agency agreement without just cause is three months and, thus, the termination will be effective at the end of the three-month period following the service of the termination notification.

 

III. Consequences of Termination


Under the general principles of Turkish Law and the Court of Appeals' precedent, a distributor can claim loss of profit, only if the termination was unlawful (without just cause or without giving notice period). Although this type of compensation used to be claimed upon the termination of a definite term distribution agreement before the expiration date of the agreement, today, this compensation can be claimed upon the termination of an indefinite term agreement as well. It is important to emphasize that granting a sufficient notice period is essential for avoiding any loss of profit claims that may be raised by the distributor, following the termination of an agreement that was executed for an indefinite period of time.

 

Mainly, two types of compensation may arise due to termination of a distribution relationship:


Compensation stipulated in Article 121 of the TCC which provides that "The party terminating the agreement without a just cause and without giving a three months' notice shall compensate the losses of the other party resulting from not completion of business commenced."
Goodwill Compensation for loss of business and for his efforts in promoting the supplier's products in the relevant market and in creating a customer portfolio which is explicitly stipulated under the Article 122 of TCC and also accepted and applied by both the doctrine and the Turkish Court of Appeal.

Pursuant to Article 122, payment of goodwill compensation accrues if the supplier derives substantial benefit from the customer portfolio gathered by the distributor. So the competent court evaluates specifics of each case before awarding for goodwill compensation in favor of distributor. Pursuant to Article 122/2 of the TCC, the goodwill compensation shall not be more than the yearly average of the payments received by the distributor during the last 5 years of the agreement. If the agreement is shorter than 5 years, then the yearly average payments made during the agreement period shall be regarded pursuant to the same Article.

If the distributor terminates the agreement without any valid reason or if the supplier terminates the agreement based on a valid ground (for instance due to the breaches of the distributor), the distributor shall not be entitled to obtain goodwill compensation.

 

The TCC specifically states that if the exclusive himself terminates the contract or the producer company terminates the contract with justified cause, the distributor shall not be entitled to claim goodwill compensation. An advance waiver of the goodwill compensation claim is not accepted by the TCC and claims must be raised within one year following termination of the contract.

 

The burden of proof to establish that the conditions for goodwill compensation are met lies with the distributor. Unless it brings sufficient proof, the distributor will lose its right to claim goodwill compensation.

Apart from goodwill compensation, based on this provision of Article 121 of the TCC, the distributor should also be compensated for the actual losses arising from termination of the distributor contract without just cause and without having received three months notice.