International Franchise Lawyers Association e.V.
 
 
Franchising in Belgium
 
For further details please contact:

WAGNER, Stephan

 

Lorenz International Lawfirm

209-A Tynystanov Street
720040 Bishkek
Kyrgyz Republic
Phone
+996 312 900 100
Fax
+996 312 66 22 33

s.wagner@lorenz-law.com

www.lorenz-law.com

 

FRANCHISE CONTRACTS AND THE BELGIAN LEGISLATION

ON THE TERMINATION OF DISTRIBUTORSHIP CONTRACTS

I.                   INTRODUCTION

1.

Franchisors who operate in Belgium and whose franchise system includes a distributorship of goods in one way or another should be aware that the Belgian distributorship legislation could affect in a rather serious way the possibility of termination of the franchise contract concluded with their Belgian franchisees.

 2.

Distributorship contracts mostly provide a term of undetermined duration or a term of determined duration , with the possibility of renewal. Belgium has within Europe a rather unique and specific legal system with regard to the termination of exclusive distributorship contract of undetermined duration. This matter is regulated by the Act of 27 July 1961 concerning the unilateral termination of exclusive distributorship concession of an undetermined duration, as modified by the Act of 13 April 1971.The Act aims to obtain a certain stability on the Belgian distribution market and to guarantee an important protection for distributors, who are active on the Belgian market and whose agreement falls within the scope of this Law.

3.

It has to be remarked that this Act only applies to the unilateral termination of agreements for an undetermined duration protected by this Law. The Act does not regulate the agreement of exclusive distributorship itself neither does it regulate the consequences of breaches in the performance of the obligations of the parties. These matters are governed by the rules of general civil and commercial law.

II.                THE APPLICABILITY OF THE CONCESSION LAW

1.

Art. 1  & 2 of the Act of 1961 give the following definition of a distribution concession :

“ A distribution concession, pursuant to this Act, is any agreement by which a principal grants to one or more distributors the right to sell in his own name and for his own account products that he himself produces or distributes.”

It is in fact a global agreement , that is more than a sequence of contracts of sale and purchase.

The distributor is the local face of the principal in the area granted to him and he sells, in his own name and for his own account, the products that the supplier produces and/or distributes. Contrary to an agency contract, the distributor bears himself the legal and economic risk of the exploitation.

According to Belgian law an exclusive distributorship agreement is a consensual agreement, that does not have to be expressed in a written document. The agreement can be deducted from correspondence, e-mails, the performance of the agreement, etc.

If the concession is exploited in Belgium, the provisions of the law are imperative, which means that parties can not derive from its provisions insofar the protection given by the legal provisions are diminished. Parties can however agree on a broader protection.

As it protects private interests, the law is however not of public order.

2.

Pursuant to art. 1 &1 of the Act of 1961 the following distribution contracts fall within the scope of the law ;

1*) Exclusive distributorship contracts

These are contracts whereby the supplier grants to the distributor in an exclusive way the right to sell the contract products in a certain area.

The supplier has then the obligation to sell the contract products within the conceded area exclusively to the distributor.

2*) Quasi-exclusive distributorship contracts

These are contracts whereby the distributor sells almost all the products of the contract within the conceded area.

These contracts will be subjected to a factual evaluation by the Courts.

According to jurisprudence 30% to 35% of the products is deemed not enough to fall under the scope of the law, while 80% is deemed enough.

3*) Distributorship contracts connected with important obligations.

Art 1 &1, 3* states that also the following contracts fall within the scope of the law :

“distributorship contracts whereby the principal imposes on the distributor important obligations, that are connected to the concession in a strict and special way and the burden of which is so heavy that the distributor would suffer great damages in case of termination of the concession.”

All four conditions have to be present cumulatively : the obligations have to be imposed by the principal; they have to be of a certain importance; they have to be connected to the concession in a strict and special way and the imposed burden must be so heavy as to cause great damages for the distribution if the concession is terminated.

Jurisprudence considers a.o. the following as important and heavy burdens : the prohibition to attract clients outside the conceded area; the prohibition to sell competing products, the implementation of a special form of organization, etc.

4.

The Concession Law offers only a protection for concessions of undetermined duration.

In principle concessions of a determined duration do not fall within the scope of the law, because it is clear from the beginning for parties when the concession will be terminated.

Normally the termination of a concession of determined duration will be governed by the provisions of general law and/or the contractual clauses that deal with termination.

Because, after the Act of 1961 came in force, suppliers tried to by-pass the law by, instead of contracts of undetermined duration, concluding only contracts of determined duration (with the possibility of renewal), an article 3bis was added by the Act of 13 April 1971, whereby it was made impossible to renew more than twice a concession of determined duration between the same parties.

After two renewals, according to art. 3bis, the concession will be deemed to be of undetermined duration, so that the protection offered by the concession law is applicable.

This is also the case if by former prolongations or renewals, some clauses of the initial contract were changed between the parties.

Furthermore, with regard to the termination of contracts of determined duration a certain formalism was introduced : parties are deemed to have agreed upon the renewal of the contract, either for an undetermined period either for the time fixed by an eventual contractual clause of silent renewal, unless they have given a notice of termination by registered mail at least 3 months and at most 6 months before the end of the agreed term.

Also the provisions, added by the Act of 1971, are of imperative law.

 

III.             THE RIGHTS AND OBLIGATIONS OF THE PARTIES PURSUANT TO THE CONCESSION LAW

Art. 2 of the Concession Law states as follows :

“A concession granted for an undetermined duration and falling under the application of this law. Can not, except in the case of serious shortcomings of one of the parties to their obligations, be terminated than with a reasonable notice of termination or with an equitable compensation, determined by the parties at the moment of termination of the contract. If parties do not agree on this, the Court will render a decision in equity, eventually taking into account the customs of trade.”

  1. The reasonable notice of termination

1.

With regard to contracts of undetermined duration, the possibility of terminating unilaterally is a fundamental right : nobody can be bound for life.

The unilateral notice is the act of law whereby the unilateral will to end the agreement is expressed.

The basis of this is not an eventual contractual shortcoming within the scope of the agreement, but the exclusive and unilateral will of one of the parties.

The notice has not necessarily to be given in writing, but can be deducted from a factual conduct, that can be equated with a termination.

The term of the notice of termination is meant to enable the other party to find a new situation that is equal to the terminated concession at the moment of the termination.

2.

Parties can only agree upon the term of the notice to be granted, after notice was given and if they do not agree, the Court will have to decide whether the term of notice was reasonable and sufficient and eventually determine the substitute compensation.

To estimate the reasonable term of notice, the Courts will usually take into account the following elements :

  • the period of the contractual relation i.e. the full duration of the continuous collaboration between parties with regard to a certain distributorship concession.
  • The reputation of the products : the more the contractual products are known to the public, the more difficult it will be to find a similar concession.
  • The situation of the market, taking into account the alternative supplies of competing products.
  • The extent of the contractual area : a local distribution or the whole Belgian territory?
  • The importance of the concession within the total activity of the distributor the turnover resulting from the concession
  • The profit resulting from the concession.
  • Etc.

 

  1. THE SUBSTITUTE COMPENSATION

Art.2 provides clearly that a concession of undetermined duration, that falls within the scope of the law, can only be terminated by giving a reasonable term of notice or an equitable compensation.

If no term of notice is given or if the term of notice is insufficient, there is cause for the payment of a compensation.

The right to this compensation emerges at the moment of the notice of termination.

If parties did not agree upon this, the Court will decide what a reasonable term of notice would have been and in function of this decide what the equitable compensation will be.

This compensation will be determined in function of the semi-gross profit.

The semi-gross profit is the gross profit less the fixed costs, or, inversed, the net-profit plus the fixed costs.

Fixed costs are a.o. the lease of the professional premises, the taxes on real property, the costs of heating, electricity, telephone, the fixed salaries, social costs, etc.

The costs are put on top of the net-profit, because they have anyway to be paid and this until the normally to be given term of notice has ended, even if the distribution concession realizes no turnover.

 

  1. THE EQUITABLE ADDITIONAL COMPENSATION

Art. 3 of the Concession Law states that, in case the distributorship concession, as mentioned in art. 2,  is terminated by the principal on other grounds than a serious shortcoming of the distributor, or, in case that the latter terminates the contract on the ground of serious shortcomings of the principal, the distributor can claim an equitable additional compensation.

This compensation differs totally from the compensation mentioned in art. 2.

Art. 3 states in a limitative way the elements in function of which this additional compensation shall be estimated.

1 The notable more value with regard to the goodwill brought in by the distributor and that will avail to the supplier after the termination of the contract.

This means that at the moment of the termination of the contract an important more value of goodwill had to be realized, that has to be calculated in comparison with the goodwill at the beginning of the concession and that at the end of it. This comparison is mostly made in function of the increase of the quantity of goods sold, the increase in number of clients, etc.

It is necessary that the goodwill is brought in as a result of the efforts of the distributor.

Moreover the distributor will have to prove that this goodwill is more connected to the products than to the person or undertaking of the distributor.

2 The costs made by the distributor in view of the exploitation of the concession and that will render advantages to the principal after termination of the contract.

The following costs will be considered a.o. :

  • the realization of a distribution network
  • costs for publicity ordered before the termination but effective after the termination or a part of the costs of publicity that keeps on having effects after the termination of the contract.

3 Severance owed by the distributor to his employees who have been licensed because of the termination.

This concerns all compensations that the distributor has to pay to his employees, who lost their jobs as a result of the termination.

 

IV.             THE TERMINATION OF THE CONCESSION ON THE GROUND OF SHORTCOMINGS

1.

Art. 2 provides that the distribution concession can only be terminated without a reasonable term of notice or without an equitable compensation, for serious shortcomings by one of the parties to its obligations and this without interference of the Court.

A serious shortcoming is any shortcoming making impossible any further co-operation between parties.

The notice for serious shortcomings has to be motivated and the serious shortcoming has to be mentioned  explicitly at the moment of termination.

2.

The Courts have upheld a.o. the following facts as serious shortcomings :

  • a total defaulting sale of the products
  • a serious amount of  payments due to the principal
  • a total disorganization of the concession
  • a breach of the exclusive purchase obligations

3.

Aside from this, parties always have the possibility to request the Court to decide upon the judicial dissolution of the contract on the basis of art. 1184 Belgian Civil Code.

Furthermore parties have the possibility to explicitly foresee in the contract which shortcomings will be considered so serious as to allow the immediate termination of the contract. The Court will then not have to appreciate the seriousness of the shortcoming but only will have to investigate if the facts as described in the contractual clause really occurred.

For this reason it is advisable to formulate these clauses precisely and the draft of these clauses is of utmost importance.

 

V.                TERRITORIAL COMPETENCE & ARBITRATION

1.

In the case the concession applies to the whole Belgian territory or part of it, the distributor has the possibility, according to art.4.1 of the Concession Law, to sue the principal in Belgium, either before the Court of his own residence, either before the Court of the residence or place of business of the principal.

If both the distributor and the principal have their residence or place of business in Belgium and a clause of competence in the contract provides for the competence of a certain court, the distributor will still have the possibility to sue the principal before the Court of his own residence.

2.

If, however, the principal has his residence or principal place of business in another country of the European Union, and the contract provides for the competence of the Court in the principal’s country, art.17 of the European Execution Treaty could be applicable.

According this art.17 of the European Execution Treaty parties have the possibility to insert a clause of forum choice in their contract and the Court therein designated will have competence.

The possibility of forum choice foreseen in art. 17 of the European Execution Treaty prevails over the regulation of forum foreseen in art. 4.1. of the Concession Law.

4.

Art.4.2 of the Concession Law further provides that if the dispute is brought before a Belgian Court, this Court shall exclusively apply Belgian Law.

If the dispute is brought before a Belgian Court and a contractual clause provides for the application of foreign law, the Court will disregard this clause and apply Belgian law.

5.

With regard to a claim brought before the Court of First Instance of Nivelles concerning a dispute between a Belgian distributor (being the exclusive distributor of the principal’s products  in Belgium, France and Luxemburg) and an Italian supplier with regard to a termination governed by the Act of 1961, the Court declared that it had  jurisdiction over the case, despite of a clause in the contract referring to arbitration under the Arbitration Rules of the Camber of Commerce of Bologna (Italy).

This judgment was reversed by the Brussels Court of Appeal. The Court of Appeal, referring to the Geneva and the New York Conventions, stated that it is the lex fori that determines if a dispute is capable of being settled by arbitration. According to Belgian jurisprudence, the application of the lex fori, in this case being Belgian law, is limited to the situation where this law prevails over the law of the contract, i.e. when it deals with matters of “ international public order” or when this law must be regarded as being a “law of direct application”.

The Brussels Court of Appeal found that the Belgian law of 1961 intends to protect the distributor, i.e. a private interest, and therefore this law can not be considered as being an instrument of public policy in the Belgian legal system, neither can it be considered  as an instrument of international public policy. The Brussels Court of Appeal declared that the arbitration clause was valid and that the Court of First Instance of Nivelles had no jurisdiction to hear the case.

 

VI.             CONCLUSION

In the light of the above it is important that franchisors whose franchise contract could fall under the above mentioned legislation, take into consideration the possibility that the termination clauses foreseen in the franchise contracts they will conclude with franchisees operating the system on Belgian territory could be affected by this legislation.

This could have a considerable impact on the termination of the franchise contract and it is therefore advisable to obtain the advice of an experienced professional in order to avoid costly mistakes.

Stephan Wagner
Attorney at Law