Turkey: Termination Of Distribution Relations

Last Updated: 15 April 2013
Article by Eda Yikilmaz and Osman Demirsöz

As the level of foreign investment in the Turkish market has plummeted during the last decades, so has the number of agency and distribution relationships with foreign companies. However, in Turkey the recent years are proving to be an era for foreign investor preference for marketing their products directly without using an agency or distributor (go-direct models); therefore, termination of agency and distributor agreements is becoming more common. So the questions to be answered: what is the procedure and what will the cost for the investor in terminating its distribution agreement with its Turkish solution partner?

In Turkey, distribution agreements are not codified but recognized as "sui generis" agreements in jurisprudence and legal doctrine, containing features of various other agreements (e.g. sales & purchase agreement, agency agreement, service agreement). Therefore, the provisions of the Turkish Code of Obligation ("TCO") and the Turkish Commercial Code ("TCC") that relate to such type of agreements are applicable to distribution agreements by way of analogy. It is accepted by the Turkish legal doctrine that especially the provisions of agency agreements as stipulated in the TCC should be applied to distribution agreements by a way of analogy. Due to the lack of explicit legislative basis, distribution agreements are evaluated on a case-by-case basis by analogies and in particular in light of court precedents.

Distribution agreements may be executed for two different terms: (i) fixed term (ii) indefinite period. Pursuant to TCC, a fixed term distribution agreement is deemed as automatically terminated upon the expiry. However, if both parties continue to perform the commercial relation even after expiry, then the agreement shall be deemed as to have been converted into a distribution agreement for an indefinite period. Further, if an agreement is signed for an indefinite term, it may be terminated following a notificaprocess tion received 3 months prior to the desired date of termination. This requirement arises out of the Article 121 of the TCC intended for agency agreements that are similarly applied to distribution agreements. Nevertheless, in the event of a material breach, distribution agreements may be terminated without any time constraint, though a proof burden would be on the terminating party's shoulder.

Mainly, two types of compensation may arise due to termination of a distribution relationship:

(i) Compensation stipulated in Article 121 of the TCC which provides that "The party terminating the agreement without a just cause and without giving a three months' notice shall compensate the losses of the other party resulting from not completion of business commenced."

(ii) Goodwill Compensation for loss of business and for his efforts in promoting the supplier's products in the relevant market and in creating a customer portfolio which is explicitly stipulated under the Article 122 of TCC and also accepted and applied by both the doctrine and the Turkish Court of Appeal.

This right for compensation enables an agent or distributor to claim compensation for the investments made for activities within the scope of the relevant agreement with its principal. The agent or distributor may base this claim on investments such as lease/purchase of buildings or specific equipment, or personnel training, marketing activities that it has carried out specifically to promote the principal's products. This type of compensation is mostly claimed upon termination of distributorship agreements, since, due to the nature of distributorship agreements, distributors invest more from their own budgets and make more strong efforts for the sale of the products. This early termination compensation claims are evaluated on a case-by-case basis, depending on the merits and facts of each claim and taking into consideration the evidence submitted by parties.

Prior to the new TCC, which became effective as of 1 July 2012, goodwill compensation was not stipulated, but was recognized in the decisions of the Court of Appeal. For instance, the Court of Appeal, in a cancellation decision, stated that where the agency does not have any default in the termination of the agency agreement, a fair compensation to be calculated by considering the commissions earned by the agency from the premiums of long term insurance agreements should be ordered in favor of the agency. Further, the High Court also ordered that the provisions of agreements preventing the payment of goodwill compensation shall be unenforceable. The Court of Appeal, in its other decisions in the same year, continued to rule under the same approach creating a precedent regarding the matter. Such judicial decisions and the EU Directive having similar regulations, created an environment under Turkish legal practice that the new TCC has a clear provision regarding this matter headed as "Goodwill Compensation".

In one another decision of the Court of Appeal, the Court decided that the distributor shall not waive in demanding goodwill before the termination of the agreement even the parties agree on such a waiver; therefore the Court ruled that such a waiver is not valid and enforceable. The Court demonstrated that the supplier has the superiority against the distributor which forces the distributor to sign the waiver. In another decision of the Court of Appeal, ruled that since goodwill compensation can only arise after the expiration of the agreement, the waiver clause which is agreed before the termination shall not be valid. As of today, Article 122/4 of the new TCC explicitly prevents distributor to waive its rights for demanding the goodwill compensation before the termination. Furthermore, waiver after the termination is enforceable. In fact, this situation relies on the general principles of Turkish law, which provides that no one can waive their right before the birth of such right. Hence, practitioners should closely examine whether the agency is acting under his free will while they waive such rights, even if this is given after the execution of the agreement. In law's preamble, it is accepted that parties can decide on the waiver clause after signing the master agreement, but even so the judge must investigate cautiously whether a threat or cheat to distributor exists or not. In brief, the waiver clause must be signed by free will to be valid.

Pursuant to Article 122, payment of goodwill compensation accrues if the supplier derives substantial benefit from the customer portfolio gathered by the distributor. So the competent judge must evaluate specifics of each case before awarding for goodwill compensation in favour of distributor. Pursuant to Article 122/2 of the new TCC, the goodwill compensation shall not be more than the yearly average of the payments received by the distributor during the last 5 years of the agreement. If the agreement is shorter than 5 years, then the yearly average payments made during the agreement period shall be regarded pursuant to the same Article. Distribution agreements differ from agency agreement, but it is set forth that this provision shall also apply to distribution agreements. If the distributor terminates the agreement without any valid reason or if the supplier terminates the agreement based on a valid ground (for instance due to the breaches of the distributor), the distributor shall not be entitled to obtain goodwill compensation.

In case of the distributor residing in Turkey, in order to avoid goodwill compensation in Turkey, parties may choose governing law of any other country which has no goodwill compensation requirements or choose supplier's country law as a governing law. By acting like this, the supplier may save itself from paying goodwill compensation. In case of the foreign law has been chosen as a governing law and it is decided that the disputes shall be settled before the arbitration or court in the foreign countries, pursuant to the Court of Appeal, Turkish law shall not be applicable and the Turkish Courts have no jurisdiction over disputes about goodwill compensation arising from the distribution agreement. In this regard, the disputes must be settled before the chosen court and/or arbitration in accordance with the chosen law. The doctrine goes along with the Court of Appeal precedents regarding choice of law and jurisdiction issue. Freedom of contract principle composes the basis of the Court of Appeal decision and doctrine's views. Although the foreign law and foreign court is chosen, if a dispute regarding goodwill compensation is submitted to a Turkish court initial objection must be raised on the choice of law and court and the Turkish court will dismiss the case, unless the court finds that the choice of law and court/arbitration is null, invalid or unenforceable under Turkish law.

Although in most of the distributor relations a foreign law is chosen, not preferring Turkish Law may have some negative consequences. First of all, the supplier or distributor must initiate a lawsuit in foreign country and then enforce the award of the foreign court or arbitral award in Turkey. So, enforcing process requires extra time and extra costs for the parties. The enforcement of the foreign court decision or arbitration award is legally possible in Turkey; however it took at least 1 or 1.5 years. Second, if the parties need any interim injunction against the other party which resides in Turkey, it is legally/theoretically possible to apply for an injunction, in practice, the courts rarely award injunctions and therefore there is very little likelihood of such application being successful. So the parties should consider both above mentioned advantageous and the disadvantageous of choosing foreign law for the distribution agreements in Turkey.

Finally, as a legal consequence of terminating an agency or distributorship agreement, the agent or distributor may claim compensation for non-pecuniary damages. Some agents and distributors claim that their commercial reputation is damaged as a result of termination of their agreements, and request compensation for such non-pecuniary damages besides the other compensations. Turkish law does not set forth any specific calculation methods for moral compensation, damages arising from investments or loss of profit claims. These claims are evaluated on a case-by-case basis, depending on the merits and facts of each claim and taking into consideration the evidence submitted by parties. However, the general principle under Turkish law is that the damages granted must not exceed the losses incurred.

Foreign investors are now opting to eliminate the agent and/or distributor, and either (a) terminate their agreements or (b) take over their businesses. In any event, the agent or distributor, as the case may be, claims compensation, and this leads to lengthy negotiations and in some cases cumbersome legal proceedings. Recent experience has shown that agency and distributorship agreements should be executed in writing at the time the legal relationship is established. One way of eliminating cumbersome procedures at the time of termination is to contractually agree on the methods and conditions for calculating compensation payable upon termination. Additionally, choice of law and jurisdiction issues must be considered during the negotiations of the agreement and most efficient and relevant law and court/arbitration should be chosen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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