Distribution or purchase agreement: the importance of correct qualification

Michelle Krekels / 24 Aug 2022

To know the mutual rights and obligations of the parties, it is important that contracts are qualified correctly. Correct qualification is also important to determine the jurisdiction of the court and the law applicable to international agreements.

The question of whether a contract is a distribution agreement[1] or a purchase agreement must often be answered at law. Although distribution agreements are common, this type of contract is not regulated by law. Consequently, the definition does not ensue from the law, but from literature and case law. The literature often refers to the Bandit judgment of the Court of Appeal of The Hague, in which the Court defined the distribution agreement as follows:[2]

“The distribution agreement – which is not regulated by law – can be described as a successive performance contract under which one party, the supplier, undertakes to provide certain products or services to its counterparty, the distributor, for the purpose of reselling those products or services to customers of that distributor at the expense and risk of the distributor and in its name.”

As indicated, a distribution agreement is a successive performance contract. The distribution agreement is often also a framework agreement pursuant to which purchase agreements are concluded between the supplier and the distributor, but not necessarily.

The purchase agreement is regulated by law. An important difference between a distribution agreement and a purchase agreement is that the purpose of the purchase agreement is to transfer ownership of a product, while the distribution agreement is aimed at a long-term collaboration between the parties to resell the products.

The fact that successive purchase agreements happen to be concluded does not mean that there is automatically a distribution agreement. The Supreme Court’s judgment of 16 September 2011 (Batavus/Vriend)[3] also addressed the question of whether there was a series of successive purchase agreements or a long-term relationship. The Court of Appeal had ruled that the conclusion of a successive performance contract does not always require an explicit offer and acceptance thereof. The Supreme Court ruled that this decision was correct. Offer and acceptance may also be tacitly made and implied in one or more actions.

The fact that the parties themselves define a written agreement as a purchase agreement or distribution agreement is not decisive either. The actual relationship between the parties is more likely to provide an answer to the question of whether a contract is a purchase agreement or distribution agreement.

The existence of a distribution agreement can be inferred from the circumstances of the case. Relevant circumstances may include: a long-term trading relationship, the designation as distributor by the parties themselves, exclusive collaboration, the extent to which the parties consult together, price agreements, a minimum purchase obligation and the obligation to promote sales. Some of these circumstances were also discussed in the decision of the Preliminary Relief Judge of the Noord-Holland District Court of 14 June 2022.

What was this case about?

Since 1996, a Dutch wine importer regularly purchased wine from an Italian supplier and then resold this wine to its customers in the Netherlands. In April 2022, the Italian supplier indicated that the wines would no longer be supplied and that the distribution of wines would be granted to another distributor.

The Dutch wine importer objected to this, taking the position that there was a distribution agreement and that the requirements of reasonableness and fairness entailed that a notice period should have been observed prior to termination.

The Italian supplier took the opposite position, i.e. that there was no permanent distribution agreement, but a series of successive purchase agreements. Therefore, it was free to terminate the trade relationship with immediate effect.

Ruling of the Preliminary Relief Judge

The Preliminary Relief Judge did not concur with the Italian supplier’s argument and ruled that the contract was a distribution agreement. In its ruling, the Preliminary Relief Judge referred to an email from the Italian supplier in which the supplier wrote that because of “changes in our distribution policy, our brand will be granted to a different distributor“. The Preliminary Relief Judge deduced from this that the Italian supplier (exclusively) grants its wine brands to various distributors and that it considers the Dutch wine importer to be its distributor for a particular wine brand.

Furthermore, the Preliminary Relief Judge ruled that the fact that no minimum purchase obligation applied did not preclude the collaboration from qualifying as a distribution agreement, as the parties had done business with each other for 25 years, on a very regular basis. The Preliminary Relief Judge also ruled that the collaboration involved more than the mere sale and supply of wines. The preliminary ruling of the Preliminary Relief Judge was that the contract was an exclusive distribution agreement.

The importance of correct qualification

Notice period

It follows from the judgment that the correct qualification of a contract is important to know what rights and obligations the parties have when terminating a contract.

An important difference between a distribution agreement and a purchase agreement is that, in principle, a purchase agreement ends automatically after the performance has been delivered and the buyer has paid the purchase price. This may be different for a (permanent) distribution agreement, because the parties mutually bind themselves to perform over a longer period of time. In that case, for example, a serious ground for termination may be required and/or a reasonable period must be observed for the termination of the distribution agreement.

After the Preliminary Relief Judge ruled that the contract was an exclusive distribution agreement, the Italian supplier was ordered to continue to perform that contract until 1 January 2023. The reason for this was that the Preliminary Relief Judge found it plausible that it would be ruled in proceedings on the merits that a notice period should have been observed prior to the termination of the distribution agreement.

Jurisdiction of the court

The correct qualification of a contract also has consequences for the jurisdiction of the court and the applicable law.

In the event of a dispute of an international nature where both parties are based in Member States of the European Union, the court will determine jurisdiction on the basis of the Brussels I Regulation Recast.[4]

Based on the main rule (Article 4(1) of the Brussels I Regulation Recast), defendants shall in principle be sued in the courts of the Member State in which they are domiciled.[5]

However, the Dutch court may also have jurisdiction on the basis of one of the alternative rules of jurisdiction. One of these rules is laid down in Article 7(1) of the Brussels I Regulation Recast. Based on this article, a defendant may also be sued in matters relating to a contract in the courts for the place of performance of the obligation in question.

For the purpose of determining the place of performance, the place where the characteristic performance of the contract was or should have been performed will be considered in matters relating to certain contracts.

In an individual purchase agreement, the delivery is the characteristic performance, whereas in a distribution agreement this is the distribution. As a result, a distributor can usually turn to a court in its own country, while this is not possible in a single purchase agreement.

In this case, the Preliminary Relief Judge ruled that the contract was a distribution agreement and that it was performed in the Netherlands. The Preliminary Relief Judge therefore had jurisdiction to examine the claims of the Dutch wine importer.

Applicable law

For the applicable law, the distinction between a purchase agreement and a distribution agreement is also important.[6]

This is because that in the absence of a choice of law by the parties, the purchase agreement is governed by the law of the country where the seller has its habitual domicile. However, the distribution agreement is governed by the law of the country where the distributor has its habitual residence. The qualification of the contract can therefore lead to the application of different legal systems. In this case, the Preliminary Relief Judge established that Dutch law was applicable because it concerned a distribution agreement and the distributor (the Dutch wine importer) had its registered office in the Netherlands.

Need advice?

The correct qualification of a contract is of great importance. Do you need advice on distribution agreements? The attorneys at Bureau Brandeis have extensive experience with (impending) disputes regarding distribution agreements and their settlement.

If you have any questions or would like any advice, please contact Michelle Krekels.

 

 

[1] Other terms used for a distribution agreement are the exclusive sales agreement or the concession agreement.

[2] Court of Appeal of The Hague 16 March 2010, ECLI:NL:GHSGR:2010:BL9873 (Bandit), para. 7.

[3] Supreme Court 16 September 2011, NJ 2011/572 (Batavus/Vriend’s Tweewielercentrum).

[4] The claims were brought after the entry into force on 10 January 2015 of Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I Regulation Recast).

[5] This rule does not apply if there is an exclusive jurisdiction rule or an exclusive choice of forum.

[6] Dutch courts determine the applicable law on the basis of Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2019 on the law applicable to contractual obligations (Rome I). For contracts concluded before 17 December 2009, the applicable law is determined on the basis of the Convention of 19 June 1980, Treaty Series 1980, 156 (Rome Convention).

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