Imagine an Austrian supplier with a network of exclusive distributors across Europe. In Belgium, he entrusts the commercialization of the product to an exclusive (Belgian) distributor. From a practical perspective – and being an Austrian supplier – the supplier imposes Austrian law to the exclusive distribution agreement. One day, the Austrian supplier decides to terminate the exclusive distribution agreement, only to be faced with a claim from the distributor under the Belgian act on the unilateral termination of exclusive distribution agreements with an indefinite duration (the “Belgian Distribution Act”). Within the EU, the Belgian Distribution Act is considered as a highly protective mandatory distribution law with (i) extensive ‘reasonable’ notice periods or an indemnity in-lieu-of notice, enabling the distributor to reorient his activities; and (ii) additional indemnities (goodwill, costs incurred, termination of personnel).
How can the Belgian law apply in contravention of the law chosen by the parties?
Since its inception on 27 July 1961, the Belgian Distribution Act stated that a distributor faced with termination of an exclusive distribution agreement applicable to all or part of the Belgian territory, can file a claim before the Belgian courts and under Belgian law. Furthermore, the Belgian Distribution Act was qualified as an overriding mandatory law under EU law, meaning that its provisions are considered crucial for safeguarding the public interests which should be applied irrespective of the law chosen by the parties (art. 9.3 Rome I Regulation).
Where the Belgian Supreme Court decided in 2016 that the Belgian Distribution Act cannot override European Regulations, and the choice of the parties for a specific jurisdiction should be upheld (art. 25 Brussels I Regulation), the Belgian Distribution Act remained an overriding mandatory law to be applied irrespective of the law chosen by the parties (Rome I Regulation). Until now! In a groundbreaking decision of the Belgian Supreme Court of 7 April 2023, the court decided that the provisions of the Belgian Distribution Act primarily protect the private interests of the parties and can therefore not be qualified as overriding mandatory provisions, i.e. cannot override the (foreign) law chosen by the parties. As a consequence, exclusive distribution agreements are also unconditionally arbitrable.
Why is this important?
Suppliers and distributors are often unaware of (i) the full impact of the law applicable to agreements with trade intermediaries (e.g. distribution or commercial agency agreements); or of (ii) overriding mandatory provisions applicable irrespective of the choice of the parties. However, these considerations are essential for supplier/manufacturer when devising the distribution strategy or evaluating it, e.g. transforming a distribution network with exclusive distributors into a commercial agency network or replacing exclusive distributors by other, more preferred exclusive distributors.
In light hereof, it is essential to:
- review the applicability of supranational overriding mandatory provisions contrary to the law chosen by the parties; and
- be informed about the implications of the law chosen to:
- decide what type of trade intermediary is best for the business, e.g. (exclusive) distributors or commercial agents;
- evaluate the consequences of a unilateral termination of the trade intermediary agreements;
- foresee the impact of mandatory national provisions contrary to contractual clauses, e.g., length of notice period, indemnity in-lieu-of notice, other indemnities and the calculation of all aforementioned;
- decide to subject disputes to regular courts or arbitration.
Please do not hesitate to contact EY Law if you would have any questions regarding a bespoke strategy for the commercialization of your products in the EU, the (re)evaluation of your current distribution network and/or your rights and obligations as a trade intermediary.