Turkey: Termination Of Distributorship Agreements

Prior to the early 2000s, when Turkey attracted less foreign direct investment and most companies chose to market their products in Turkey not directly but through intermediaries, distributorship agreements were very common. In the last decade, however, foreign companies are increasingly eager to be directly present in Turkey and to sell their products and services themselves, without any distributors. This has led to the termination of many distributorship agreements, which has triggered claims by distributors seeking compensation from manufacturers. Manufacturers intending to market their products directly in Turkey should, therefore, follow the appropriate legal procedures when terminating their agreements with distributors.

I. Agency and Distributorship Agreements in the Turkish Legal System

Distributorship agreements are not regulated under Turkish law. Although not specifically regulated, distributorship agreements can be executed within the context of the "freedom of contract" principle. The characteristics of distributorship agreements are similar to those of agency agreements. As a natural consequence of this, it is generally accepted that the Turkish Commercial Code's (the "TCC") provisions relating to agency agreements should also be applied to distributorship agreements, by way of analogy.

The TCC defines an "agent" as follows:

"A person who acquires a position, based on an agreement, to negotiate or enter into agreements on behalf of a commercial undertaking in a specific place or region, without the title of representative, trade agent, sales officer or employee."

In the absence of a definition in the law, scholars have defined "distributorship" agreements as follows:

"... a continuous framework agreement governing the legal relationship between a producer (or exporter/importer depending on the circumstances) and the distributor, whereby the producer undertakes to supply the products to the distributor, who in turn, will sell these products within a certain territory, acting in its own name to increase the sales of these products within that territory."

Although agency agreements and distributorship agreements have a lot in common, there is a significant difference that cannot be overlooked. Agents operate on behalf of another party without taking any risk, whereas distributors buy and sell products on their own behalf and undertake all the potential risks. It should be kept in mind that both are independent from the principal (i.e. not representatives, officers or employees).

II. Termination of Distributorship Agreements

As the provisions regarding agency agreements are applied to distributorship agreements by way of analogy, the general principle and process for termination of both types of agreements are almost identical. The general rule for the termination of both agency agreements and distributorship agreements executed for a definite term is that they will be automatically terminated at the end of their term. They can also be terminated with just cause, before their expiry date.

As for the termination of agreements executed for an indefinite term, the termination procedure will differ, depending on the reason for termination. First and foremost, the termination must be made in writing and in accordance with Article 18 of the TCC. Paragraph 3 of this article provides that termination of any kind of agreement signed by and between merchants must be terminated with a notification to be sent through notary public, a registered letter, via telegram or e-mail signed with secured and registered electronic signature.

Secondly, the reason of the termination must be taken into account when terminating a distributorship agreement. In the presence of a just cause, such as the distributor's breach of contract, the distributor's actions constituting unfair competition etc., the termination will have the immediate effect; whereas, in the absence of just cause, the termination requires a notice period. Under the TCC, the notice period for terminating an agency agreement without just cause is three months and, thus, the termination will be effective at the end of the three-month period following the service of the termination notification. In practice, this three-month period is also applicable for the termination of distributorship agreements. Nevertheless, the distributor may claim that the termination was unlawful due to the fact that the length of the notice period is insufficient, based on the length of the commercial relationship, business volume and distributor's contribution to the principal's business. In such event, the courts may deem the three-month notice period insufficient. To give an example, in a recent decision, a commercial court of Istanbul that heard a lawsuit between an electronic goods manufacturer and its exclusive distributor, held that the notice period should be six months.1

III. Consequences of Termination of Agency and Distributorship Agreements

As the result of the termination of agency and distributorship agreements, agents/distributors are entitled to claim certain types of compensation.

(a) Loss of Profit

Under the general principles of Turkish Law and the Court of Appeals' precedent, an agent or a distributor can claim loss of profit, only if the termination was unlawful (without just cause or without giving notice period). Although this type of compensation used to be claimed upon the termination of a definite term agency/distribution agreement before the expiration date of the agreement, today, this compensation can be claimed upon the termination of an indefinite term agreement as well. It is important to emphasize that granting a sufficient notice period is essential for avoiding any loss of profit claims that may be raised by the agent/distributor, following the termination of an agreement that was executed for an indefinite period of time.

There is no specific method to calculate the amount corresponding to loss of profit. Courts assess the amount of this type of compensation on a case-by-case basis. Where an agency/distribution agreement is for a definite term and it is terminated before its expiration date, the agent/distributor may have right to claim loss of profit for the period between the termination date and the agreed expiration date. In indefinite term agreements, it is more difficult to calculate the exact amount, as this will depend on what the court will find as a sufficient notice period (at least three months).

(b) Compensation for Damages Arising from Investments of Agent/Distributor

An agent or a distributor is able to make investments to maximize the sales and increase the trademark value. These investments may be made upon either the supplier's request or at the agent's/distributor's sole discretion. For instance, a distributor/agent may sign agreements for the lease/purchase of buildings or specific equipment, architecture agreements, may provide training for employees, etc.

The principal's request for such investments generates a heavy responsibility of loyalty. If the principal terminates the agency/distribution agreement before these investments are amortized, such actions would be deemed as contrary to the agent's/distributor's benefits, so they would constitute a breach of responsibility of loyalty. Therefore, in the event of termination of the distributorship agreement without just cause, the agent/distributor has the right to claim compensation for any investments made for the enhancement of the sales within the scope of relevant agreement. The important point here is that, these investments can only be compensated if they are made upon the approval of the principal.2 In the above-mentioned lawsuit between the electronics giant and its exclusive distributor in Turkey, the local court held that:

  • severance payments and notice period compensations that had to be paid to the employees who had been hired by the distributor during the relationship and who had to be dismissed due to the termination of the distributorship agreement;
  • advertisement expenses that had been incurred by the distributor for the purpose of promoting the principal's products;
  • damages incurred due to the termination of lease agreements that had to be terminated due to termination of distributorship agreement; etc.

are among the damages that should be compensated by the principal.

(c) Compensation for Non-Pecuniary Damages

An agent or a distributor is able to claim compensation for non-pecuniary damages upon termination of an agency/distribution agreement, in accordance with the general provisions of non-pecuniary compensation set forth in the Turkish Civil Code. In this regard, an agent/distributor may claim that its commercial reputation has been damaged as a result of termination of the agreement.

There is no specific method stipulated in Turkish law for calculating the amount of compensation for non-pecuniary damages. The amount is calculated based on the merits and facts of each claim, on a case-by-case basis. In any event, it must be equitable and may not exceed the losses incurred.

(d) Portfolio Compensation

The final type of compensation is most commonly known as "portfolio compensation". This compensation is based on having created or expanded a client portfolio for the principal. According the TCC, portfolio compensation can be claimed if:

  1. an entity continues to substantially benefit from the clientele that the agent has attained for that entity, after the commercial relationship between the entity and its agent has ended;
  1. as a result of the termination, the agent loses its right to claim fees for any work carried out (or to be carried out within a short period of time) for clients that were brought in by the agent; and
  1. payment of such compensation is equitable and required under the circumstances.

If the agreement is terminated by the agent/distributor through no fault of the principal or by the principal due to the agent's/distributor's fault, the agent/distributor cannot claim this type of compensation.3

As to the calculation of portfolio compensation, the maximum amount of portfolio compensation will be the average of the yearly commission fees and/or other payments that the agent has received from the principal in the last five years (or the complete term of the agreement if the commercial relationship lasted less than five years). As distributors do not generate commission payments, it is suggested in scholarly opinion that the maximum amount of the distributors' portfolio compensation should be the average of the distributor's net profit in the last five years of commercial activity carried out for the supplier (or the average of all years if the distributorship agreement was in effect for less than five years). In a potential lawsuit, the court will ask an expert witness to review the distributor's commercial books and records to decide on the amount of the portfolio compensation.

Footnotes

1. In this decision, the court stated that due to similarities between the dissolution of the exclusive distributorship relationship after termination and dissolution of an ordinary partnership, a six month notice period (applicable for ordinary partnerships, governed by the Turkish Code of Obligations) should be applied to the termination of exclusive distributorship agreements.

2. Decision of the 19th Civil Chamber of the Court of Appeals, E. 2003/4397, K. 2003/7331, dated 3 July 2002.

3. Article 122 of the TCC

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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Authors
Gürhan Aydın
Burak Eryiğit
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