Marketing Contracts in the New Civil and Commercial Code

After several false starts, with the recent enactment of the Civil and Commercial Code, the agency, distribution and concession agreements have had legislative reception.
 
This legal text is the immediate antecedent of the unified draft Code of 1998 and was written taking into account an important part of the extensive case law.
 
Although the distribution agreement has no specific treatment in the new Code, Section 1511 is governed by rules applicable to the concession agreement “when relevant.”
 
1. The general contract law
 
The new Code has also amended the general rules of contracts. Traditionally, the party’s autonomy and the enforceability of contracts have been two paradigmatic principles of the former Civil Code that the current reform has moderated based on an extensive case law.
 
Although the new Code reaffirms the principle of freedom of contract, it also sets the limits “imposed by law, public order, morality and good standards” (Section 958).
 
Similarly, Section 959 confirms the enforceability of contracts and adds that its contents “... can only be modified or terminated by the agreement of the parties or in cases provided by law.”
 
After discussing relevant aspects of the formation of consent, the new Code innovates when referring to adhesion contracts or to standard contract terms by setting specific limits on the enforceability of contracts. (Sections 984-989).
 
Section 985 states that clauses redirecting to forecasts, documents or information not provided to the counterparty at the time of signing the contract, shall be deemed not agreed. Section 987 states that ambiguous clauses shall be construed against the proponent. Section 988 stipulates that clauses shall be deemed unwritten when they: (i) distort the obligations of the proponent; (ii) import waivers or restrictions on the rights of the adherent or the unreasonable expansion of the rights of the proponent; and (iii) those which are not reasonably foreseeable by the adherent.
 
Section 989 gives the judge unprecedented powers to form part of the contract, a faculty that, until now, case law had rejected.
 
The implementation of these rules will surely converge in the drafting of contracts with clear and concise terms, with self-sufficient forecasts and without redirected references, with a new balance between the powers and duties of the parties and without advance waivers of fundamental rights.
 
2. The agency contract
 
In the same way as was stipulated in the draft Code of 1998, Section 1479 of the new Code defines this contract as one in which the agent, as an independent broker, promotes and concludes for and on behalf of the principal –without representing them– the selling of goods and services. The legal text provides that the contract must be executed in writing but does not indicate the legal consequences of not doing so.
 
Section 1480 provides that the agent is entitled to exclusivity in the field of business, in a geographical area or for a group of people, specifically determined by the contract. As a standard available to the parties, it admits to be agreed otherwise (non-exclusive agency contract).
 
On the other hand and with respect to the inverse relationship, in principle the agent can hire the services to other businesses (Section 1481). However, the agent cannot accept operations of the same sector or that are competing with the principal’s business, unless authorized by the principal.
 
The rule does not allow the agent to ensure the collecting of the principal, but only until the sum of the agent’s commission (Section 1482).
 
Sections 1483 and 1484 establish obligations of the agent and the principal by using an enumeration that is not exhaustive.
 
Section 1485 states that “The agent does not represent the principal for the purposes of the conclusion and execution of contracts in which he is involved.” The legal text emphasizes the independence of the agent’s management and the lack of power to perform acts which are unrelated to the specific task of the agent.
 
Generally, the agent’s remuneration consists of a commission paid by the principal at the conclusion of the business or after the collection of the sales is done, either by a variable or a fixed amount, sometimes displayed as a percentage of the turnover of the manufacturer or producer.
 
If the remuneration is not agreed on Section 1486 states that a variable remuneration must be fixed according to uses and customs. Section 1487 sets some guidelines for determining the commission.
 
Section 1499 allows for non-compete clauses, which can only be extended for one year after the termination of the contract.
 
Section 1500 prevents the agent from appointing subagents without the express permission of the principal. This standard is interesting since it indicates that the agent is jointly and severally liable for the actions of the sub-agent, who has no direct link with the principal.
 
It is an accepted principle that the term of a marketing contract is essential for the fulfilling of its purpose. Legal scholars and case law have long held that the minimum term of the contractual relationship should be the time needed for the agent to amortize investments and obtain a reasonable profit, linked to the legitimate expectations generated at the time the contract was agreed on.
 
Conversely to what happens in the regulation of the minimum term of the concession and distribution contracts (by reference), which is of four years, and franchise contract which is of two years, there is no mention in the new Code of the minimum term of the agency contract. However, from the harmonious interplay of Sections 1491 and 1492, some legal opinion understands that it should not be less than one year.
 
Section 1491 provides that the agency agreement is for an indefinite period, unless otherwise agreed. If the relationship continues after the expiry of the contractually set deadline, the rule clarifies that it will automatically become an indefinite term agreement.
 
Section 1492, following the criteria of the leading case “Automóviles Saavedra” provides that in contracts of indefinite period, either party may terminate the contract (without cause), giving the other party a sufficient prior notice.
 
The new Code partially adopted the formula of Section 1373 of the 1998 draft, saying that “The prior notice period should be equal to one month for every year that the contract remained in force, up to a maximum of six (6) months.” However, despite the case law trend that gives grounds to this time limit, Section 1492 excluded it for agency, distribution and concession agreements, keeping it only for the franchise agreement.
 
It should be noted that despite the guidelines given by the new legal regime, judges will be the ones to establish the maximum period of  prior notice –precisely as they have been doing until now– on a case-by-case analysis of the time needed for the marketer of the products or services to amortize  investments and earn a reasonable profit, and of the time needed to settle orderly or rearrange  business, variables that are not related to the antiquity of the business relationship.
 
In cases of agency agreements of indefinite term, the omission or insufficiency of the prior notice gives the agent the right to claim to the principal: (i) the loss of earnings during the prior notice period that would have been received considering the agent’s antiquity (Section 1493); and (ii) a compensation in relation to the ‘clientele’ given that the agent has significantly increased the business’ turnaround of the principal and this activity allows the principal to continue obtaining significant benefits after the termination of the contract (Section 1497).
 
Notably, in Section 1493, when setting the compensation to be paid by the principal to the agent by the untimely termination of the contract, it remains unclear whether the compensation refers to “gross” or “net” profits, although legal opinion and case-law have already taken a position by ‘net’ profits, a solution that is linked to the purpose of the compensation of placing the agent in the same situation in which they would have been if the contract had continued.
 
When Section 1497 refers to compensation for the ‘clientele’, it states that it cannot exceed the amount equivalent to one year’s earnings, net of expenses. Both legal opinion and case law believe that it refers to net profits, according to the agent’s records.
 
Section 1494 enumerates –not limited to– certain grounds for termination of contracts with and without fixed term. Under this rule, the termination occurs by operation of law in the event of death or incapacity of the agent, dissolution of the agent’s company, or in the event of declaration of bankruptcy by the court.
 
The aforementioned article adds that if the termination cause is the significant decrease of the agent’s business turnover, the termination cannot be based on the agent’s non-compliance, thus the principal will only be able to exercise the option under Section 1492, namely, give the agent a prior notice of one month for each year of antiquity of the relationship, unless the reduction in the agent’s business turnover is maintained for two consecutive years, in which case the notice may be limited to two months. This rule applies to contracts with and without fixed term.
 
A linear interpretation of the latter provision will certainly condition severely the termination of contracts on the basis of failure to meet the agent’s sales targets.
 
3. The concession contract
 
Section 1502 defines the concession contract as one in which the concessionaire, acting on their own account against third parties, agrees to use a company to market goods and services to third parties, in exchange for a payment.
 
This standard refers to a payment which is not part of the essence of the concession contract, in which the principal does not pay any remuneration to the concessionaire, since the profits of the concessionaire arise from the difference existing between the price of the product that pays the principal and the retail price.
 
Although sometimes there may be mixed situations, for instance what happens when the concessionaire for automobile sales acts as an agent in the operation of the saving system, what is certain is that also in this case the commission paid by a company linked to the manufacturer also comes from the price gap existing between the price paid by the concessionaire and the retail price.
 
Unless otherwise agreed, exclusivity in the assigned area is bilateral (Section 1503). The same rule requires the principal to provide a whole range of products to the concessionaire for its marketing.
 
Sections 1504 and 1505 list –but not limited to– the obligations of the principal and the concessionaire.
 
Section 1506 provides that the concession will not have a period shorter than 4 years or 2 years in the event that the manufacturer is providing the facilities to the concessionaires. Any shorter period will be deemed not written.
 
Once the minimum term of the concession agreement has elapsed (4 or 2 years), where the law presumes that the business purpose has been minimally met, the principal can terminate the contract by providing an adequate prior notice, applying the guidelines of Section 1492, of one month per year of antiquity.
 
Following the guidelines of a major part of the commercial case law of the last decade, the new rule states that if the prior notice is inadequate or does not exists, the principal must compensate the concessionaire by paying him the earnings that the concessionaire was deprived from during the period that would have corresponded to the prior notice (Section 1493). In principle, according to the legal text and the interpretations of the case law mentioned above, any other compensation item not specifically provided for by the rule would be incorporated into the amount corresponding to the compensation of the payment in lieu of notice.
 
In the event of an untimely termination of the contract, Section 1508, paragraph b) obliges the principal to repurchase the concessionaire’s stock of new spares and parts, at the selling price to the concessionaire. This settles an issue which has been extensively discussed by legal authors and case law.
 
With respect to the grounds for termination and the prohibition to appoint sub-concessionaires, the standards applicable to the agency agreement are applied by reference.
 
4. The distribution contract
 
Although the distribution agreement is the “genus” and the concession agreement the “species”, the latter standards apply to the first, as states Section 1511, when relevant.
 
In view of the existing legal gap, when the application of the concession standards are not relevant, the patterns built by legal opinion and case law shall be considered.