The analogous and automatic application of the Law on Agency Contracts (Law 12/1992 of May 27th) to distribution contracts has been a contentious issue, which the Supreme Court has clarified in recent years, concluding that such application is improper. The Court of Justice of the European Union came to the same conclusion in 2009 (Turgay Semen/Deutsche Tamoil GmbH case), regarding the inapplicability of the compensation regime established in Directive 86/653.
It is necessary, therefore, to analyse how the process of discharge and the consequences of unilateral termination of indefinite and undocumented distribution contracts, which is a common type of commercial relationship between manufacturer and distributor, should be handled.
The Supreme Court judgment of the 8th of October 2023 (No. 569/2013), citing an earlier one from the 15th of March 2011, establishes that either party has the right to terminate an indefinite distribution contract. However, such termination must not be unexpected or unforeseen, and the behaviour of the party seeking termination cannot amount to an abuse of rights or unfair conduct performed in bad faith during the exercise of such rights. This reference is addressed in particular to the manufacturer’s conduct. In the event that such abuse takes place, the contractual relationship will indeed be discharged, but compensation will be due if damage or loss results from the abuse.
On this point, with respect to the distributor’s breach, the Supreme Court states that the manufacturer’s failure to give prior notice of termination of the contract is potentially liable to cause damage and loss, since it prevents the distributor from correcting or redirecting its conduct. If such damage exists, it is not limited to the actual loss caused by the lack of notice; but may extend to loss of profit.
Of course, this potential compensation will only arise and become applicable when the contract is terminated without just cause and such termination is unexpected or unforeseen. Furthermore, it is for the distributor to effectively prove both the existence of the damage and its quantification. Mere speculation or hypotheses are insufficient to prove damage. Conversely, if there is a justified ground for termination of the contract, such as failure to pay invoices for supplied products, no right to compensation will arise; otherwise, it would result in unjust enrichment, based on the distributor’s own breach. And even in the presence of such a clear breach of contract, its immediate termination, without offering the distributor the possibility of remedying the breach of its main obligation to the manufacturer, seems necessary, under penalty of lending itself to the interpretation that the right to termination was exercised abusively.
Based on the assumption that the contract was terminated without cause or just cause, the need to give advance notice of the termination of the contract does not stem from the direct and automatic application of Article 25.2 of the Law on Agency, but rather from the principles of prohibition of unjust enrichment or equity, and even that of good faith in contracts (Articles 1258 of the Civil Code and 57 of the Commercial Code). The same applies with respect to customer compensation and Article 28 of the Law on Agency. In both cases, the Supreme Court acknowledges an analogical application of the Law on Agency’s underlying concept regarding compensation upon termination of the contract, but not its automatic application, as will be outlined below. In any case, the success of a claim for such damages shall be subject to the condition of providing double proof: existence and quantification of the damage.
Application by analogy of the compensation rules in the Law on Agency may only be made when the requirement of “identity of reason” is met. The Supreme Court rulings of 11th December 2014 (No. 697/2014) and of 9th July 2015 (No. 404/2015) clearly emphasize this, stating that in the case of compensation for insufficient notice, and in the absence of an express agreement, the relevant provisions are Articles 1101 and 1106 of the Civil Code, among others; thus, direct analogy to the Law on Agency’s compensation regime is not admissible.
In summary, consolidated case law holds that the mere absence of prior notice, in itself, does not automatically entitle the injured party to compensation under Article 29 of the Agency Law. The existence or absence of loss from lack of adequate notice must be proven and must be based on a breach of the principles of loyalty and good faith in the dealing between the parties to the contract by the party who terminated it. It is necessary to examine the facts and background in each case to conclude whether these requirements are met.
A recent Supreme Court judgment of 20th May 2025 (No. 2220/2025), in a case involving an indefinite oral distribution contract of more than ten years’ duration, after a detailed compilation of previous judgments on the matter, summarizes the Supreme Court’s position as follows:
(1) Any party to an indefinite distribution contract has the right to unilaterally terminate the contract, without prior notice, specifically due to its “sine die” character.
(2) However, as for prior notice, when there is neither just cause for termination nor contractual good faith on the part of the manufacturer, its absence may be considered an abusive exercise of the right to contract termination.
(3) In the absence of contract or express provisions to the contrary, compensation for possible damage resulting from failure to give prior or sufficient notice is governed by Articles 1101 and 1106 of the Civil Code, among others, and not by direct or analogical application of the penalty regime established in the Agency Law.
(4) Nonetheless, the Agency Law may be applied for these purposes when the necessary factual requirements are demonstrated (“identity of reason”). Such damage includes actual loss and loss of profit (the gain or patrimonial increase expected during the period of notice).
Even considering all the above, the judgment states that each case’s circumstances must be considered; the claimant of damages must prove their existence. In other words, the Agency Law compensation cannot be mimetically or automatically applied to all such cases. Although in the case at issue the manufacturer’s prior notice did not comply with the Agency Law, the Supreme Court denied the automatic application of its compensation regime and, accordingly, reversed the first instance and appeal verdicts, rejecting the damages claim since the distributor did not effectively prove specific damage. In fact, the exclusivity regime between the parties was limited to the manufacturer, so the distributor could have done business with other companies after the contract was terminated; in addition, the distributed product’s sales did not reach 2% of total turnover, and the distributor did not demonstrate any reduction in turnover during the notice period granted by the manufacturer.
Finally, the judgment notes that, even assuming (purely hypothetically) the existence of damage, the compensation method based on the monthly average of purchases/sales between the parties over the past five years is inadequate, since that would allow the distributor to obtain the product free of charge during those notice months. This would constitute unjust enrichment and would undermine the very foundation of compensation, which is based on the principle of equity.
Eduardo Vilá
Vilá Abogados
For more information please contact: va@vila.es
5th of September 2025
