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There are no specific statutory rules for a Dutch distribution agreement. A distribution agreement for an indefinite term can in principle be terminated, but reasonableness and fairness (redelijkheid en billijkheid, Article 6:248 Dutch Civil Code) may require a sufficiently compelling reason, a reasonable notice period or an offer of compensation (Supreme Court, 28 October 2011). A fixed-term agreement in principle runs until its end date.
The contract comes first: the parties can agree on notice periods and grounds for termination. Where the contract is silent, the general rules of Dutch contract law apply. Our team also advises on Money loan agreement in the Netherlands.
How do reasonableness and fairness affect termination?
Where neither the law nor the contract regulates termination, a long-term contract for an indefinite term can in principle be terminated (opgezegd). Reasonableness and fairness may, depending on the nature and content of the contract and the circumstances, require that termination is only possible for a sufficiently compelling reason, that a certain notice period is observed, or that the termination is accompanied by an offer to pay compensation (HR 28 October 2011, ECLI:NL:HR:2011:BQ9854). Even if the contract contains a termination clause, reasonableness and fairness can impose additional requirements where the contract leaves room for this (Article 6:248(1)), and relying on the clause can be unacceptable in exceptional circumstances (Article 6:248(2)) (HR 2 February 2018, ECLI:NL:HR:2018:141, SMQ/Goglio). In SMQ/Goglio, a 15-year licence agreement allowed termination after written notice of a breach and a 60-day cure period; the Supreme Court upheld the finding that this pre-agreed clause did not need supplementing. We regularly assist clients with Reseller Agreement in the Netherlands.
What is a reasonable termination clause?
Suppose that you, as a manufacturer, supplier, intermediary, distributor or, commercial agent, enter into a collaboration aimed at continuous performance (for example, you repeatedly conclude purchase agreements or repeatedly offer or receive services). In legal jargon, this is referred to as a long-term agreement.
Under contracted cooperation between two parties, for example, several purchase agreements can be concluded or services provided as a commercial agent. As an option this agreed cooperation can be captured, for example, in a distribution agreement under Dutch law or agency agreement. The termination of a distribution agreement or agency agreement is bound to legal frameworks. For an agency agreement in the Netherlands, this process is slightly more rigid because the Civil Code has a section with the main rules of agency law (Articles 7:428 onwards Dutch Civil Code). When terminating a distribution agreement, we in the Netherlands look more to case law, i.e. what the courts in the Netherlands consider ‘reasonable and fair’ when terminating a long-term contract. In this blog, our Dutch attorney specializes in Dutch contract law and informs you about the considerations and correct way to terminate an ongoing contract. In doing so, our litigation attorney for contract matters will also zoom in on leading Dutch Supreme Court case law (SMQ/Goglio, on a licence agreement) about the termination of long-term contracts such as a distribution agreement. This closely relates to Direct distribution in the Netherlands.
A distribution agreement is an agreement between a supplier and a distributor who buys the products and resells them in its own name and for its own account. It is an unnamed contract (onbenoemde overeenkomst): Dutch law has no specific statutory rules for it. The agreement usually covers its duration, the applicable law, the competent court and often exclusivity for a territory and sales targets.
How do you terminate a distribution agreement?
First of all, we would like to inform you that there is a difference between ‘dissolving’ (ontbinden) and ‘terminating’ (opzeggen) a distribution contract under Dutch law. We often see this terminology used interchangeably in commercial practice, but there are differences.
Be careful with the general word ‘ending’ (beëindigen): it can mean dissolution (ontbinding) as well as termination by notice (opzegging).
In short: dissolution is a remedy for a failure in performance by the other party (Article 6:265 Dutch Civil Code). Termination by notice requires no breach, but you must respect the contractual grounds for termination or the notice period and, where reasonableness and fairness require it, offer compensation. That compensation is meant to make good the other party’s loss; it is not a penalty.
What determines whether you can terminate a distribution agreement?
In principle, several elements play a role in whether a long-term contract, such as a distribution agreement, can and may be terminated. Conditions with the termination of a distribution agreement in the Netherlands may also be attached.
If the agreement is for an indefinite term and neither the law nor the contract regulates termination, the starting point is that it can be terminated. However, reasonableness and fairness may, given the nature and content of the contract and the circumstances of the case, mean that termination is only possible if there is a sufficiently compelling reason.
There is also a second element: reasonableness and fairness can require that a certain notice period is observed. Especially when the parties have done business together for many years, an abrupt termination is often not acceptable. There is no statutory notice period for distribution agreements. There is no fixed rule of thumb. The notice period depends on the circumstances of the case, such as the dependence of the distributor and its investments. For commercial agents, by contrast, the law sets the notice period: absent agreement, four months, plus one month after three years and two months after six years (Article 7:437(1) Dutch Civil Code).
A third element is that, depending on the circumstances, a termination of a distribution agreement in the Netherlands may have to be accompanied by an offer to pay compensation. This can be the case when the termination directly causes loss and it is reasonable to compensate it.
In summary, based on the circumstances of the agreement and the situation it should always be tested for the termination whether:
– a compelling reason for doing so is required;
– a (longer) notice period is required;
– the payment of compensation is required.
Our Dutch law firm in the Netherlands assists companies in terminating long-term contracts. The strategy that needs to be taken is not always clear. MAAK Advocaten advises companies on their position and often conducts negotiations on behalf of their clients to be able to bid farewell to the contract without too much damage in the event of termination.
Can you terminate a fixed-term distribution agreement early?
As a rule, a distribution agreement entered into for a fixed term cannot be terminated early, unless the contract or the law allows it. A party that ends the agreement early without such a basis risks being in breach of contract and liable for damages.
Think of the example where you agree distribution of your Dutch products by a foreign trading partner, in which you have entered into an agreement for five (5) years. As a manufacturer, it would be particularly undesirable if your distributor, after having enjoyed certain benefits from your knowledge as a manufacturer, was able to terminate the cooperation early easily. On the other hand, as a distributor, it can also be very important for you to enter into a fixed-term cooperation without the manufacturer being able to take leave early. As a distributor you enter into obligations towards your customers, whereby you expect the manufacturer to be able to and to continue to perform during that period and you need to be able to enforce this if necessary.
Under Dutch law, two important exceptions to this general rule:
1. Other possibilities of termination can follow from the law. For example, if the agreement qualifies as a contract for services (overeenkomst van opdracht), the client can terminate it at any time (Article 7:408(1) Dutch Civil Code). Many service providers are not aware of this. Between businesses, the contract can exclude this right, so that a fixed term (for instance, five years) applies; only a client acting as a consumer is protected against such a deviation (Article 7:413(2)). Whether this rule applies at all depends on how your agreement is qualified.
2. Another point which you should pay attention to is whether the long-term contract which you are about to enter into does not itself contain undesirable interim termination clauses. These may also provide a reason to end a contract in a shorter period of time than expected (and for the benefiting contracting party sometimes can be used as an escape clause to avoid being bound for too long to a distribution agreement). An example is a so-called ‘change of control’ clause whereby if the company is taken over, it may immediately terminate the distribution agreement. Another example is if another party levies a pre-judgment attachment in the Netherlands on your company and a relevant clause is included allowing the other party to terminate the distribution agreement in that case.
In short, the termination of a fixed-term distribution agreement in the Netherlands is subject to strict requirements. Such a contract can generally only be ended early if the contract or the law allows it, if insisting on the fixed term would be unacceptable under reasonableness and fairness (Article 6:248(2)), or if the court modifies or dissolves the contract because of unforeseen circumstances (Article 6:258 Dutch Civil Code). Courts apply these grounds with restraint. Nevertheless, the law or the agreement may offer an opening, and it is important that you are well informed about this by a contract law specialist.
How do you end an agreement for an indefinite term?
Unlike a commercial agency contract under Dutch law, a distribution agreement has no statutory rules. We call this type of agreement an ‘unnamed’ one. Franchise agreements, by contrast, are now regulated in the Civil Code (Articles 7:911 onwards).
For a distribution agreement that has been in place for years, you need to be aware of the consequences you have created by doing so (whether or not it was intentional).
Essentially, in general, you can terminate a continuing contract for an indefinite period. Of course, the conditions under which you entered into the contract will play a role. For example, have conditions been created to be able to give notice of termination at any time? Or is there a legal rule that justifies a short or reduced notice period?
Here too the three elements we discussed earlier come into play. Namely, can the “requirements of reasonableness and fairness” considering the nature and contents of the contract and the circumstances of the case imply that termination is only possible if there is a sufficiently serious ground for termination? Should a certain period of notice be observed if the parties have already been doing business with each other for a long period? Is additional compensation appropriate in this situation? These questions all need to be considered carefully.
You must consider how to terminate as a manufacturer, distributor, commercial agent or, other buyer. You would be well advised to think this through and make a well-considered proposal in your letter of termination. If you fail to do so, you may be ordered to pay high costs in a civil action before the court. In our experience, in B2B disputes the court often accepts that the cooperation has ended and focuses on the financial consequences, such as compensation for a notice period that was too short. If you have not carefully thought about the impacts of the separation, this can lead to increased litigation risks.
When can you dissolve a distribution contract?
In addition to terminating a long-term contract, you may also dissolve a long-term contract, such as a distribution agreement or an agency contract.
Dissolution requires a failure in performance by the other party (Article 6:265(1)), for example when sales targets are not met or deliveries repeatedly arrive too late. The failure does not have to be attributable to the other party: also in case of force majeure (overmacht), such as a company fire or a natural disaster, the contract can be dissolved. In that case, however, the other party does not owe damages (Article 6:74(1) Dutch Civil Code).
If performance is neither permanently nor temporarily impossible, the other party must first be in default (verzuim) (Article 6:265(2)). This usually requires a written notice of default giving a reasonable period for performance, after which performance does not follow within that period (Article 6:82(1)). Default occurs without such a notice, for example, when a fixed deadline for performance expires (unless the deadline has a different purpose), or when you must infer from a communication of the other party that it will fail to perform (Article 6:83(a) and (c)). Once the other party is in default, you may dissolve the contract, unless the failure, given its special nature or minor importance, does not justify dissolution (Article 6:265(1)). One late delivery out of many, or one overlooked invoice, will usually not be enough.
Dissolution under Article 6:265 Dutch Civil Code has a different regime than termination by notice. Dissolution releases the parties from the obligations concerned; for performance already rendered, an obligation arises to undo what was received (Article 6:271). For a long-term contract, dissolution often only affects the part that has not yet been properly performed (partial dissolution, Article 6:270). This can lead to undesirable situations. The statutory rules on dissolution are default (non-mandatory) law, so between businesses the contract can in principle limit or exclude the right to dissolve.
The termination does not require a default, but more importantly a stronger test of reasonableness and fairness. When faced with the choice, be well-informed about what remedies you can invoke.
Frequently asked questions about terminating a distribution agreement in the Netherlands
Can a distribution agreement for an indefinite term be terminated under Dutch law?
In principle, yes, if neither the law nor the contract regulates termination. Reasonableness and fairness may require a sufficiently compelling reason, a reasonable notice period or an offer of compensation, depending on the nature and content of the contract and the circumstances (Article 6:248 Dutch Civil Code; HR 28 October 2011, ECLI:NL:HR:2011:BQ9854).
Is there a statutory notice period for distribution agreements?
No. The notice period follows from the contract or, failing that, from reasonableness and fairness, so the court looks at factors such as the duration of the relationship. Commercial agency agreements are different: Article 7:437 Dutch Civil Code sets a statutory notice period for them.
Is a distributor entitled to goodwill compensation when the agreement ends?
There is no statutory goodwill indemnity for distributors. The clientele compensation (klantenvergoeding) of Article 7:442 Dutch Civil Code applies to commercial agents (handelsagenten), who negotiate or conclude contracts on behalf of a principal (Article 7:428). Whether a distributor is owed compensation on termination depends on reasonableness and fairness in the specific case.
What is the difference between terminating and dissolving a distribution agreement?
Termination by notice (opzegging) ends the agreement for the future and requires no breach. Dissolution (ontbinding) requires a failure in performance by the other party and, if performance is still possible, default (Article 6:265 Dutch Civil Code). After dissolution, performance already rendered may have to be undone (Article 6:271).
Can a fixed-term distribution agreement be terminated early?
As a rule, only if the contract or the law allows it. In exceptional cases, insisting on the fixed term can be unacceptable under reasonableness and fairness (Article 6:248(2)), or the court can modify or dissolve the contract because of unforeseen circumstances (Article 6:258). Dissolution for a failure in performance remains possible (Article 6:265).
Primary sources
- Dutch Civil Code Book 6: Articles 6:74, 6:82, 6:83, 6:248, 6:258, 6:265 and 6:271
- Dutch Civil Code Book 7: Articles 7:408, 7:413, 7:428, 7:437, 7:442 and 7:911
- HR 28 October 2011, ECLI:NL:HR:2011:BQ9854
- HR 2 February 2018, ECLI:NL:HR:2018:141 (SMQ/Goglio)
Dutch lawyer specialized in distribution contracts
If you have any questions or require legal assistance about the termination of a distribution contract, please don’t hesitate to reach out to our knowledgeable and dedicated team at our Dutch law firm.
