Agency and distribution: termination

Different rules apply to the termination of agency and distribution agreements. What do you have to consider if you want to terminate an agreement? What are your rights if an agreement is terminated?

Agency and distribution agreements usually run for longer periods of time. But what happens if the parties do not want to continue an agreement? For example, if a manufacturer realizes that it would be less expensive to sell directly to customers? Or if a principal has been dissatisfied with the results achieved by an agent? And what if a distributor, contrary to all agreements, sells products of a competitor? Is it possible to terminate an agreement just like that? Or does a notice period apply? And does it make a difference whether it concerns an agency or distribution agreement?

Fixed-term agency and distribution agreements: terminability and notice period

To determine whether your agency or distribution agreement is terminable, you need to know first of all whether you have entered into a fixed-term agreement or into an open-ended agreement. Has the agreement been entered into for a fixed-term of, for example, two years? In that case the agency or distribution agreement cannot, in principle, be terminated prematurely. However, when entering into an agreement, the parties may arrange that the agreement can be terminated prematurely. In that case the minimum statutory notice periods still apply to agency agreements. The following applies on termination:

• within one year: one month;
• after one year or more, but within two years: two months; and
• after two years or more: three months.

When it comes to distribution agreements, parties are free to determine the length of a notice period.

Open-ended agency and distribution agreements: terminability and notice period

Many agency and distribution agreements have not been entered into for a fixed term but are open ended. Are these agreements terminable?

Yes, open-ended agreements are, in principle, always and without exception terminable. In very exceptional cases it may happen that one party needs a compelling reason for the termination of a distribution agreement.

On terminating an open-ended agency or distribution agreement, the terminating party must apply a notice period. The length of such a notice period depends on whether it concerns an agency or distribution agreement. What are the notice periods?

Agency

Minimum statutory notice periods apply to agency agreements. It makes a difference whether the parties have made arrangements about the notice period themselves or not. If the parties have not made arrangements about the applicable notice period, they have to apply an minimum notice period. The following applies in agency agreements of:

• up to three years: four months
• more than three years, less than six: five months; and
• more than six years: six months.

Have the parties made agreements about the applicable notice period? In that case they still need to comply with the minimum notice periods applicable to fixed-term agency agreements. This is, in the event of termination:

• within one year: one month;
• after one year or more, but within two years: two months; and
• after two years or more: three months.

Distribution

Contrary to agency agreements, distribution agreements are not regulated separately under Dutch law. That means, there are no specific notice provisions for this type of agreement. In principle, parties are free to make arrangements about the termination of the agreement themselves, and they can even determine a notice period. Minimum notice periods do not apply.

Have the parties made no arrangements about the notice period? In that case they have to apply a reasonable notice period. It is often hard to determine what a reasonable notice period is. It differs per case. It may play a role whether the party that terminated the agreement was offered compensation. If a court finds in retrospect that a notice period was too short, the termination is not valid.

Do you have to take a guess and hope you apply a reasonable notice period? Not exactly. For the determination of the notice periods to be observed different rules of thumb have been proposed that may provide more clarity. For example, it has been proposed to make the notice period dependent on the length of distribution agreements, counting 1.2 months or 1 months for each year as a notice period. It has also been proposed to use the minimum notice periods of agency agreements as a starting point.

In practice, the court will have to weigh the different interests of the parties involved. All relevant circumstances will be taken into account. It may be of importance to what degree distributors financially depend on the distribution agreement or whether they recently had to make investments for the performance of the agreement.

Conclusion

Terminating an agency or distribution agreement is not always easy. It may be hard to determine for you, as a supplier or distributor, whether an agreement is terminable and, if so, under what conditions and with what notice period. Legal advice may provide a solution.

Distribution and agency lawyers

Has your distribution or agency agreement been terminated? Or would you like to terminate such an agreement and you do not know where you stand? We will be happy to help you. Also, if you want to prevent such issues by including them in an agreement. Please contact us: