On May 11, 2023, the Belgian Supreme Court has ruled in a matter concerning the immediate termination of a distribution agreement, based on an explicit termination clause.
The case concerned the termination of a distribution agreement by Rolex. A contract clause allowed Rolex not only to terminate the agreement in case of contractual breach, but also “for any other valid reason”. Rolex assumed that the accusation of fraud by the distributor’s directors concerned such a “valid reason”.
According to the Court of Appeal, the impact on Rolex’s image and reputation was objectively serious enough to qualify indeed as a “valid reason”, enabling Rolex to invoke the explicit termination clause to unilaterally terminate the agreement.
However, the Supreme Court was stricter and rejected the judgment of the Court of Appeal.
The Supreme Court referred to the mandatory Belgian law regarding distribution agreements, which stipulates that such agreements can only be terminated with observance of a reasonable notice period or by payment of a fair compensation, except in case of serious breach by one of the parties in fulfilling its obligations. This provision does not deviate from standard contract law (Article 1184 of the old Civil Code), which states that each party has the right to request the dissolution of an agreement when a contracting party fails to fulfill its contractual obligations. This implies that (also in a distribution agreement) parties can only rely on an “explicit termination clause” if the concerned breach concerns (also) the breach of a contractual obligation.
To conclude, when drafting a distribution contract, it is important to pay specific attention to the wording of an explicit termination clause, in order to facilitate the burden of proof for the party invoking such clause. The mention of “any valid reason” is clearly not sufficient.
Barbara Terriere, IDI Country Expert for distribution in Belgium
