(i) General Remarks
Distribution, as a business collaboration contract, has been defined, at least following the interpretation that has prevailed in Uruguay, as a contract between independent parties, each of which fulfills its respective activity without, in principle, a preeminence of one over the other party.
A distributor, when he agrees to market the products of a manufacturer or supplier, does so with the understanding that he will fulfill a function as an independent party and with the expectation of profiting in the business, a “margin” that is typically calculated by considering the sales price and the price of the product offered to the final consumer.
In Uruguay, except in particular circumstances, the distributor does not have the right of compensation in the event of termination of the contract by the manufacturer. The reasons that may justify a compensation are based on certain particularities that the termination may have had, the most important being, in the case of termination without cause of oral contracts or without a term, the absence of reasonable prior notice and/or the abuse in the exercise of ending the contract.
The attempts that have been made, both at the commentator’s level and through judicial claims, to require new compensation from distributors, have generally been rejected by stable jurisprudence on the matter.
It is clear that cases are not exactly the same, which determines that in a country like Uruguay where there is no Distribution Act, it will be enough for there to be a particular situation, well defended, for a potential court to grant special compensation to a certain distributor.
Situations such as that of a supplier that conditions the continuity of a distribution relationship on the granting of an important guarantee, the making of a significant investment or the hiring of a number of workers and that ends the distribution relationship after a month, are examples in which a decision-maker could consider granting compensation for termination of the contract, even though reasonable notice was complied with and the relationship was not terminated in a particularly abusive manner.
Thus, a highly discussed question among commentators and comparative jurisprudence is whether in any case the distributor could be entitled to compensation for obtaining clientele or for a possible goodwill of the products that until the point of termination of the contract were distributed by a distributor. The situation is quite clear when a product that is being distributed has already enjoyed recognition and reputation in the distribution territory, while it is difficult for a distributor to validly claim that its activity generated the link between the consumer and the brand. which already preexisted.
However, even in the case of new brands such as, for example, Asian products that have had a massive entry into Uruguayan market and region, jurisprudence and also doctrine have generally remained constant in that there is no room for a claim for compensation for clientele or goodwill. This, above all, for a basic reason that is linked to what was stated at the beginning, in that the distributor has a role in the contractual relationship as an independent operator and its work/effort for the fostering of a brand, does not It is nothing more than a consequence of their regular activity and there should be no special compensation for it.
In this article, we will not be claiming a radical change to what has generally been maintained in Uruguay, because we agree with what was mentioned above and that it would imply distorting the distribution regime, pretending that the creation of a clientele for the supplier It is an end in itself that must be compensated. We believe that what the distributor receives in the margin already compensates him for his work and if a market value is obtained for the product, this is a virtuous consequence of the contract for which the distributor is already paid.
It is no our intention to claim that there are similarities in the relationship between a distribution contract and an employment relationship, the comparison is helpful to exemplify that the improvement of the reputation of a company is not paid separately to a worker, or even to a service provider, everything It is included in the salary received for their work.
However, what we did find interesting is to raise the issue while the situation of compensation for goodwill is discussed at the level of Comparative Law, as will be seen. But, furthermore, if a special rethinking of these premises is not necessary after the advent of online sales through platforms or other distance sales mechanisms that allow a product to reach, with relative ease, the other side of the world.
ii) Goodwill regulation in the Comparative Law
The situation in the European Law, zone in which these issues have been fully analyzed and are the focus of discussion, is varied but the possibility of demanding compensation for goodwill in the case of distribution contracts is an issue at stake.
Regarding agency contracts, there are specific European Union regulations[1] by which an agent could access compensation in the event of termination of the contractual relationship. This is applicable, to the extent that the contractual relationship is governed by the law of a member country of the European Union and certain conditions set forth by Section 17 of Directive EEC/86/653 are met.
However, there are countries in the area in which compensation to distributors for goodwill could also apply.
In Europe, the compensation in question is linked, firstly, to financial compensation in favor of the distributor for the contribution of customers and certain billing that may have remained in favor of the supplier or manufacturer, after the termination of the commercial relationship, depending the amount of the specific case.
In the case of distribution contracts in the strict sense, a unified regulation has not yet been achieved, not even in the European Union, with the situation being varied in the region.
In some countries such as Italy and France there is no compensation for capital gains in favor of the distributor, unless it has been expressly agreed in the contract, while in other countries, such as Belgium, compensation is provided for by law. There are other countries in which it was introduced and regulated by jurisprudence, applying by analogy the legislation on agency or other legal institutions, as has occurred in countries such as Germany, Austria, Portugal and Spain.
iii) Compensation for Goodwill in Uruguay
Compensation for goodwill or clientele in the context of the termination of distribution contracts is a topic that has been discussed in recent times.
Furthermore, recently, some cases were resolved by courts, not only in Uruguay but also in other countries in the region, referring to compensation for goodwill. These new cases have treated goodwill and clientele as elements that could be compensated.
Although compensation for goodwill is not regulated in Uruguay, it is a type of compensation that distributors frequently pursue in cases of termination of distribution contracts.
The Uruguayan Courts, historically, have not accepted compensation for goodwill, fundamentally, because it has been resolved that in a collaboration contract between independent contractors (Distribution and even Franchise), an alleged goodwill is not compensable because it is a simple consequence of the work that must be done. Making a distributor, that is, developing brand value and increasing clientele is nothing more than what a distributor should do.
In agency contracts, due to the difference in the nature of the contract, agents can expect the principal not to sell the products directly to the agent’s clients during the contract and compensation after the termination of the contract. This is usually regulated in Agency contracts in Uruguay.
However, although this is the historical rule in Uruguayan jurisprudence on Distribution, we have identified new approaches in recent cases in Uruguay and also in Argentina.
Hence, in Uruguay, national courts have issued rulings that reject compensation for goodwill in the specific case but do not take the step of saying that it is not compensable. Therefore, they could, interpreting contra sensu, open the possibility that, in certain circumstances, compensation for goodwill could be granted in Uruguay[2].
Likewise, as mentioned above, in Argentina, a Court of Appeals in what is known as the “DIAGEO Case” (Argentine Court of Appeals, dated March 1, 2016), decided that compensation for goodwill, under certain conditions, can be admitted.
This new trend is causing certain clauses to be included in distribution and franchise contracts in Uruguay in order to regulate this situation, seeking to avoid this type of claims by distributors or franchisees.
In this context, it is interesting to explore not only new approaches in jurisprudence, but also how it is reacting in practice, when drafting contracts at the beginning of new contractual relationships.
These alternatives are already being regulated in the Distribution and Franchise contracts of Uruguay.
This new tendency, is making that in distribution and franchise contracts in Uruguay certain clauses are included in order to regulate this situation pursuing to avoid this type of claims by distributors or franchisees.
In this context, it is interesting to explore not only new approaches in jurisprudence but also how contract drafters are reacting when drafting contracts.
iv) Brief Analysis of Contractual Ways to Handle Risks
These alternatives are already being regulated in Uruguayan Distribution and Franchise contracts.
- Considered as part of Distributor / Franchisee Main Obligations
Parties may agree, in the contract, that no compensation would be granted to distributor or franchisee since goodwill is a typical and direct consequence of the work of the distributor/franchisee.
This clause, generally speaking, would not be considered as abusive and would be enforceable in favor of franchisor or the supplier. However, provided that distributor or franchisee are asked to increase clientele for example (in writing or in fact in the context of the commercial relationship) this should be considered by courts.
Another way to minimize the risks is setting forth, expressly, that distributor or franchisee are not required to improve clientele, trademark value and so forth, as part of their obligations.
- Goodwill indemnity is already included in the Consideration of the Distributorship
We have seen in practice this type of clauses stating that even though it can be accepted that distributor or franchisee may deserve compensation for goodwill, this is considered by parties as part of the consideration of the contract i.e. the margin distributor is receiving.
- Anticipating an agreed value as Goodwill indemnity
In order to avoid differences between parties on the existence of the right of receiving compensation for goodwill, parties may agree in a specific value or a percentage of the revenues of the distributor in a specific period.
It is a resource common in practice to limit the amount of damages in civil liability.
This solution would be more convenient for distributors but, on the other hand, may avoid discussions on the value of compensation granting more predictability to Supplier and Franchisor.
- Acknowledgment of well-known Trademark
Typically, in practice, distributors and franchisees may accept that clientele is genuinely obtained due to the product or the trademark, which are already well known in the territory of a specific country.
This assertion can be challenged in Court by the distributor or franchisee. For instance, we have seen cases, recently, in which this issue was raised in case of distribution of Chinese high-value products that were not recognized in Uruguay.
In Franchise agreements it is also common to set forth the franchisee would participate in the development of the Know-How and would contribute to its adaptation to the specific expectations of the clientele located in the Territory.
However, this would not grant a specific compensation.
v) Goodwill and new trends in Distribution
As previously said, new technologies have come to facilitate transactions in various areas and distribution has not been the exception. Product marketing platforms have allowed online distribution, through platforms that are true virtual shopping centers, to allow products to circulate easily around the world, having a penetration that was not possible in the past.
Currently, the traditional agreements between manufacturer and distributor by which the parties agreed on the way in which the advertising of a product was going to be carried out in a territory, have given way to new forms of global distribution in which the scope of a manufacturer may be higher.
We are all certainly accustomed to brands and products from certain countries, but it is less common for products from distant parts of the planet to be distributed locally.
Thus, if by virtue of new technologies and the development that online sales have achieved through platforms, we see a greater possibility that products from other latitudes can capture the attention of Uruguayan consumers. It must be taken into account that, perhaps, these may be products or even techniques or services that are not used in our country or region.
For example, consider a New Zealand inventor who has created a revolutionary product for horses. Nobody knows him, but due to the ease that the new platforms provide, this inventor through a local platform starts to be distributed and the product begins to be marketed in an extraordinary way, due to the affinities of the activities from one country to the other.
Beyond the assumption, which is generally clear and already verified today, these types of situations, driven by new technologies and online distribution, could add to those that promote the compensation of goodwill.
We do not claim, as already stated, for global solutions or for legislative treatments of these very day-to-day commercial situations, but we do believe that there may be situations in which compensation of goodwill or clientele could be appropriate, especially in cases in which it is critical the work of the distributor, in this case digital, in the construction and fostering of a brand or product that was previously totally unknown.
The contractual solutions that were previously developed and the solutions that have been given at the commentators’ level and jurisprudence are valid, but we believe that the cases should be analyzed on a case-by-case basis, with room for compensation of this type under certain circumstances.
[1] Section 17 of Regulation EEC/86/653 of the European Union
[2] Court Decisions 7/2020 of the Civil Superior Court for the 5th Section, dated February 20, 2020 and 9/2020, of the Civil Superior Court for the 19th Section
Hector Ferreira, IDI Country Expert for agency & distribution in Uruguay
