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New Trends in Portuguese Case Law regarding the Distributor’s Indemnity IDI – Internacional Distribution Institute Col-legi d’Advocats de Barcelona June 2009

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity No specific Portuguese regulation on Distribution Contracts Principles that rule interpretation of contracts: General freedom to contract (Article 405 Portuguese Civil Code) Analogy with similar contracts (Article 10 Portuguese Civil Code) General Principles of Law

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Constant jurisprudence in Portuguese Courts: [decisions by the Portuguese Supreme Court of Justice (Supremo Tribunal de Justiça, STJ) of the 12th December 1996, 23rd September 1997, 23rd April 1998, 18th November 1999, 12th June 2003, 15th April 2004, 22nd September 2005, 10th October 2006, 13th September 2007, 5th March 2009…] Applicability, by analogical interpretation: Decree–Law nr. 178/86, 3rd July Decree-Law nr. 118/93, 13th April both hereinafter the Agency Law

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Applicability through analogical interpretation to Commercial Distribution Agreement’s termination upon the presence of certain circumstances Principle for the analogous application of Agency Law: the distribution agreement is an atypical agreement not directly treated by any particular lex specialis subject to the principle of freedom of contractual provisions regulated by what the parties establish (provided that they do not contradict imperative/mandatory laws, if any) in absence of contractual regulation, by the general rules of contract law if necessary, by the specific rules that regulate contracts that present the biggest analogy with distribution agreements – the Agency Law – with the necessary changes

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Agency Law has, in its preamble, an express reference to the analogous application of such law to Distribution Agreements: “As for the latter [the distribution agreement], a certain tendency to keep it an atypical contract is detected in the comparative law, along with the pointing out of the necessity to submit it, by analogy – if and when applicable –, to the same rules of the agency contract, especially on what concerns the termination of the contract”

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Circumstances of Principal-Distributor contractual relationship and mutual rights and obligations which may allow the applicability of the Agency Law by analogy: The performance by the Distributor of tasks similar to those of the agent as to be a factor of attractiveness of customers The high degree of integration of the Distributor in the Principal’s network The possibility for the Principal to benefit from the customers of the Distributor in the territory The economical dependency of the Distributor towards the Principal

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Cumulative prerequisites of the Clientele Indemnity (article 33 of Decree-Law nr. 178/86): The Distributor has brought to the Supplier new customers or has significantly increased the volume of business with existing customers and The Supplier continues to derive (or may potentially derive) substantial benefits from the business with such customers, and The Distributor does not receive, after contract termination, any retribution for contracts promoted or concluded with such customers (Case Law has considered this prerequisite as inapplicable to Distribution Agreements – STJ, 12.12.1996) Provided that the Distributor has not given cause to termination of the Distribution Agreement

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Calculation of the goodwill indemnity through analogous application of Agency Law: on an equitable basis not higher than a figure equivalent to an indemnity for 1 year, based on the distributor’s average annual profit from sales over the preceding 5 years if the contract goes back less than 5 years, the indemnity shall be calculated on the average for the period in question

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Portuguese courts take the equitableness of the goodwill compensation very literally and always stay much attached to the particulars of each case The numbers and method vary from case to case, preventing the drawing up of a “mathematical formula” Portuguese courts tend to reduce dramatically the amount claimed by the Distributor, even if said amount respects the rules previously mentioned It is quite unusual for a Distributor to receive the full “5 years average annual profit”

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Factors typically considered by Portuguese courts to determine the actual amount by equity: the time needed by the terminated party to find a comparable situation the disadvantages and damages to the Distributor occurring from the loss of distribution contract the duration of the contractual relations the level and the evolution of the Distributor’s turnover in relation to products distributed the general success or failure of the Distributor’s activities the nature of the products concerned and the renown of the trademark the costs and investments made by Distributor the nature of the obligations assumed by Distributor the circumstances surrounding the termination

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity The most recent Supreme Court decision: 5th March 2009 “(…) 4. The clientele indemnity is destined to compensate the agent of the activity it has performed and which the Principal came to benefit from; it is the payment of a goodwill placed at the principal’s disposal, created or increased by the agent. Even if the agent has not suffered any specific damage, that compensation is justified by the benefits that the other party may come to obtain, disregarding if they have actually occurred, being sufficient the possibility that they come to occur. 5. Article 33 of the Decree-Law nr. 178/86, which grants a clientele indemnity to the agent upon the termination of the contract, is an imperative law.”

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Particulars of the case: The contract was in force from the 14th May 1986 until 22nd June 1999 The Principal terminated the contract based on an reorganization of its distributors network, previously informed to and discussed with all distributors The distribution contract was regarded as atypical and, consequently, the Agency Law was considered to be applicable by analogical interpretation A clientele indemnity was due based on mentioned article 33 of the Agency Law, if its requisites are met The Distributor has brought to the Supplier new customers or has significantly increased the volume of business with existing customers and The Supplier continues to derive (or may potentially derive) substantial benefits from the business with such customers, and The Distributor does not receive, after contract termination, any retribution for contracts promoted or concluded with such customers

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Particulars of the case: Actual grounds for the clientele indemnity : The Principal’s products (cars) were very poorly distributed in the geographical area prior to the contract and had a bad public image The Distributor had contributed to the improvement of the presence of the Principal in the geographical area by obtaining new clients The Distributor’s activity had contributed so that the sales of the Principal products (cars) came to represent 7,68% of the whole national car sales market The Distributor bought several specific equipment for the repair and maintenance of the Principal’s products sold, in order to develop its commercial activity, expand the Principal's registered mark and fulfill the Principal's contractual demands Due the business evolution, the increase in sales and the growth in the maintenance of the clients’ cars, the Distributor had hired 21 workers, which were given the adequate training for the correct execution of their tasks

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Particulars of the case: Actual grounds for the clientele indemnity : The clients obtained by the Distributor passed on to the new distributor, which sold them more of the Principal’s products and performed their maintenance The new distributor has informed by mail all the clients of the change of the Principal’s distributor, by using the previous Distributor’s files Although the Distributor never met the sales objectives agreed with the Principal, the truth is that the Distributor increased the annual volume of sales of the Principal’s products from 1995 to 1999 Notwithstanding the fact that the Principal’s products have notoriety and prestige, thus making it easier to place in the market, the obtaining of new clients was a result of the Distributor’s activity As for the 3rd requisite, the Distributor did not receive, after contract termination, any retribution for contracts promoted or concluded with such customers

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Particulars of the case: Calculation of the clientele indemnity : The Distributor asked for +/- € 270.000,00 The 1st Instance Court set the indemnity on +/- € 190.000,00 The Court of Appeal set the indemnity on +/- € 150.000,00 The Supreme Court sustained this value, considering that since the Distributor had, during the 14 years that the contract entered into force, had an average annual income of +/- € 250.000,00 and that his annual net profit was not proven The equitable judgment was based on all the grounds previously mentioned

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity Particulars of the case: Still, there was a clause in the contract stating that:“unless if otherwise imposed by law, the [Principal] shall not pay any compensation to the distributor as a consequence of the termination of the present agreement, irrespective of its underlying reason” Since this is a contractual provision in the sole interest of only one party to the agreement, i.e., the Principal, Since article 33 of the Decree-Law is a legal provision destined to protect the weakest link in the negotiation process, with less capacity to negotiate, then such provision must be imperative, Such clause is precisely the imperative law that lead the parties to establish the caveat “unless if otherwise imposed by law” Although with the same practical effect, unlike the previous Supreme Court decision of 15th November 2007, this contractual provision was not expressly considered null and void

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity The question remains: Being an atypical contract, is the parties’ freedom to contract and create their own rules limited by the analogous application of another law OR Are the parties totally free to create their own rules and the analogous application of another law may only occur if there is a shortcoming in the contract ? No unanimous answer in the Portuguese doctrine: In the first case, some authors defend that there are mandatory rules because they concern public order reasons (to protect the weaker negotiating party) In the second case, some authors defend that such position is to turn an atypical contract into a typical one…

New Trends in Portuguese Case Law regarding the Distributor’s Indemnity STJ 03.05.2004 The Clientele Indemnity ceases if the Distributor does not communicate to the Supplier, within one year from termination of contract, that the Distributor wants such indemnity and it does not file the relevant law suit within the following year to that communication. TRC 10.01.2006 In what relates to termination with cause of a Distribution agreement, it is inadmissible the evocation during court proceedings of a material breach by Distributor not mentioned in the notice by which the Supplier has terminated the Distribution Agreement. STJ 03.06.2003 In what relates the minimum period of notice for the parties to terminate a distribution contract, it is necessary to refer to the ad hoc circumstances (mainly, investments made and time necessary to depreciation) to determine what that minimum period of notice should be. Portuguese case-law is not consistent on determining if the criterion to be applicable is the one of Gross Profit or Net Profit. However, in two recent decisions the criterion used was that of Net Profit. (STJ 23.11.2006;TRL 29.03.2007) (STJ 03.05.2004 for the Gross Profit criterion)

AV. DA BOAVISTA, 3383 – 8º TORRE SANTANDER – 4100-138 PORTO PORTUGAL Contacts PEDRO DA COSTA MENDES Advogado / Lawyer Sócio / Partner costamendes@cncm.pt JOÃO GUTIERRES Advogado / Lawyer Associado / Associate joao.gutierres@cncm.pt www.cncm.pt Curado, Nogueira, Costa Mendes & Associados – Sociedade de Advogados, RL AV. DA BOAVISTA, 3383 – 8º TORRE SANTANDER – 4100-138 PORTO PORTUGAL