The customer compensation in distribution contracts does not arise automatically when the contractual relationship ends. Unlike the agency agreement, the distribution contract lacks specific legal regulation, which has led Spanish case law to recognise, under certain requirements, the analogical application of the principle underpinning Article 28 of the Commercial Agency Contract Act (Ley del Contrato de Agencia, “LCA”).
The Supreme Court has acknowledged that, in certain circumstances, the distributor may be entitled to customer compensation, provided that the required conditions are strictly proven and that such compensation is deemed equitable.
Requirements for a distributor to claim customer compensation
It is well known that a commercial agent is generally entitled to customer compensation upon termination of the contract, in accordance with Article 28 of the Commercial Agency Contract Act. artículo 28 de la Ley sobre Contrato de Agencia.
In the case of a distributor – an atypical figure without specific statutory regulation – such entitlement is not automatic. However, Spanish case law has held that, under certain conditions, the principle underlying that provision may be applied by analogy, so that, upon termination of a concession or distribution agreement, the distributor may also claim customer compensation.
This conclusion results from a long-standing doctrinal and jurisprudential debate.
Supreme Court doctrine on customer compensation for distributors
Particularly relevant is Supreme Court Judgment No. 1392/2007 of 15 January 2008 (RJ 2008/1393), issued by the Full Civil Chamber (Sala Primera de lo Civil) for the specific purpose of unifying doctrine, having acknowledged that prior case law was inconsistent.
In that judgment, the Supreme Court held that:
“This Chamber maintains its doctrine recognising the possible entitlement to customer compensation upon termination of concession or distribution contracts,” although “the analogical application of the principle underlying Article 28 of the Commercial Agency Contract Act cannot be based on mimetic or automatic criteria; rather, in each case, the distributor must prove both the effective contribution of clientele and its potential future use by the grantor.”
From this judgment—and subsequent case law—it follows that the Supreme Court recognises customer compensation in distribution contracts, but not automatically: only where the necessary prerequisites have been previously proven.
The basis for this entitlement lies both in the analogical application of the principle inspiring Article 28 LCA and in the requirement to perform contracts in accordance with good faith, usages, and the law under Article 1258 of the Civil Code. This criterion has been reiterated in numerous subsequent decisions.
Essential requirements for customer compensation in distribution contracts
According to established case law, customer compensation for distributors has the following characteristics:
- It does not arise upon every termination of a distribution contract.
It is not an automatic or imitative consequence of any termination. - It requires proof of an effective contribution of clientele.
The distributor must demonstrate that, as a result of their activity, they have generated or increased clientele for the grantor. - The future benefit of such clientele must be proven.
It is necessary to show that the manufacturer or grantor will be able to benefit from that clientele after termination of the contract, which requires a reasonable forecast.. - A high standard of proof is required.
The Supreme Court has repeatedly emphasised the need for strong and sufficient evidence of both elements. - The compensation must be equitably justified.
Even where the above requirements are met, the compensation must be fair in light of the specific circumstances of the case, a matter to be determined by the court. - Wide scope for freedom of contract.
In distribution contracts, contractual freedom is far greater than in agency agreements, and the parties may expressly exclude customer compensation, provided that this reflects their genuine contractual intent.
How to calculate customer compensation in distribution contracts
Under an agency contract, the amount of customer compensation may not exceed the equivalent of one annual average of commissions earned during the last five years of the contract, in accordance with Article 28.3 LCA.
In the case of a distributor, this rule does not apply directly, since the distributor does not earn commissions but obtains profit through a commercial or resale margin—that is, the difference between the purchase price of the product and the selling price to the end customer.
This structural difference initially led to some inconsistency among courts when quantifying customer compensation for distributors.
Established jurisprudential criterion: net profit, not gross margin
The Supreme Court has settled this issue by establishing that, when customer compensation is applicable in distribution contracts, it must be calculated by reference to the net profit of the distributor, not the gross margin.
This was expressly stated in Supreme Court Judgment 356/2016 of 30 May (RJ 2016/2293), which held that the guiding criterion of Article 28 LCA should be applied to the net profits obtained by the distributor—that is, the portion of profit remaining after deducting expenses and taxes—and not to the gross commercial margin.
To this end, the judgment considers:
- Staff costs
- Transport costs
- Financial expenses
- General business expenses related to sales
- Depreciation, taxes, rents, and interest
“[...] However, Judgment 39/2010, beyond referring to that of 22 June 2007 to characterise that, in distribution contracts, remuneration consists of the difference between the purchase and resale prices, is not conclusive as to whether that calculation should be made on gross or net differences. Nevertheless, there is case law establishing that, for determining the amount of customer compensation in distribution contracts, the guiding criterion of Article 28 LCA should be used but calculated, instead of on the commissions received by the agent, on the net profits obtained by the distributor (Judgment 296/2007, of 21 March (RJ 2007, 2620)); that is, the percentage of profit remaining after deducting expenses and taxes, and not on the commercial margin, which is the difference between the purchase price of the goods and the retail price (Judgment 346/2009, of 20 May (RJ 2009, 3184)). That amount shall be the maximum limit.”
The appealed judgment, like that of first instance, correctly applies this jurisprudential doctrine, as it expressly considers “the expenses necessary to obtain the sales proceeds (staff, transport, financial and general overheads), that is, the net profit—the difference between gross profit (income minus operating expenses) and incurred costs (salaries, depreciation, taxes, rents, interest).”
This same criterion has been reiterated in Supreme Court Judgments 137/2017, of 1 March; 317/2017, of 19 May; and 944/2023, of 13 June, establishing this as a fully consolidated jurisprudential criterion.
Maximum limit and determination of the final amount
The cited judgments emphasise that the amount resulting from applying the guiding criterion of Article 28.3 LCA—namely, an annual average of the net profits obtained by the distributor during the last five years of the contract—represents the maximum limit of the compensation.
The specific amount to which the distributor may be entitled will be determined by the court based on the evidence produced, provided that the required conditions are found to be met and to the extent that they are proven.
Ultimately, this is a matter of the assessment of evidence in light of the specific facts of the case and how they have been established during the proceedings.
Conclusion
Customer compensation in distribution contracts is a concept recognised by the Spanish Supreme Court, but it is neither automatic nor general. Its award requires strict proof of the distributor’s contribution of clientele, the grantor’s potential future benefit therefrom, and a quantification based on the distributor’s net profit, always within the equitable limits that must guide judicial decision-making.
Author: Fernando Martínez Sanz.
Lawyer specialising in Commercial Law and distribution contracts.
