Turkey: Terminating Agency and Distributorship Contracts: Issues to Consider

As the number of foreign products and services in the Turkish market has increased since the 1980s and 1990s, so has the number of agency and distributorship relationships with foreign companies. The 21st century, however, is proving to be an era of foreign investor preference for selling their products directly, without using an intermediary or distributor. Consequently, termination of agency and distributorship contracts is becoming more common than their establishment. From a legal perspective, this has generated debate over the formalities to be followed when terminating such contracts, as well as the compensation arising from termination.

While distributorship contracts are not specifically regulated under any article of Turkish law, agency contracts are governed by the Turkish Commercial Code ("TCC"). By way of analogy, Turkish lawyers and the judiciary have been applying the TCC provisions related to agency in resolving disputes arising from distributorship contracts. While the extent of this analogy's validity is debatable, the conditions for entitlement and the quantification of portfolio compensation are even more uncertain.

The TCC defines an agent as "a person who, without the title of representative, trade agent, sales officer or employee, is contracted to negotiate or enter into contracts on behalf of a commercial enterprise in a specific place or region." Under relevant provisions of the TCC, agency contracts can be entered into for definite or indefinite terms. This differentiation leads to differing rules regarding termination of the relevant agency contract. Accordingly, an agency contract executed for a definite period will be deemed terminated at the end of the term, unless otherwise provided in the contract. If, however, an agency contract is concluded for an indefinite term, the TCC provides that either party may terminate it with a three-month prior notification at any time. However, should the agent claim that the termination was unlawful due to the length of the commercial relationship and volume of business between the parties, as well the agent's contribution to the principal's business, the court may deem the three-month notice period insufficient, depending on the merits of each case. The parties may terminate the agency contract with immediate effect, if there is a just cause.

Unlike agency, distributorship contracts are not specifically regulated under Turkish law. A non-statutory definition of distributorship contracts offered by scholars is:

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

The main difference between an agency and a distributorship contract is that while a distributor buys, imports and undertakes the risk of the product subject to sale, an agent only acts as the intermediary, and negotiates the product's sale from his/her principal to the potential customer(s).

Turkish scholars generally accept that distributorship contracts are of a sui generis nature, and that because no specific statutory provisions apply to them, they are governed by general principles applicable to similar types of contracts, such as "agency" and "sale-purchase" contracts. For this reason, and as stated above, the TCC's provisions regarding agency contracts and general provisions of sale contacts, as set forth under the Turkish Code of Obligations ("TCO"), have been applied to certain aspects of distributorship contracts by way of analogy. Turkish courts and scholars have employed this analogy particularly in connection with the establishment and termination of exclusive distributorships.

Applying the TCC's provisions on "agency" by way of analogy, the general principle adopted in connection with the termination of exclusive distributorship contracts is that these contracts can be terminated with or without just cause, subject to the provisions of the TCC. Under Article 20/3 of the TCC, in all commercial contracts, termination notices must be made in writing and sent via registered mail, notary or telegram. If the termination is based on just cause, the cause should be explicitly indicated in the termination notice. This is a formality that companies acting without legal counsel commonly neglect. Neglecting this statutory formality invalidates the termination, thereby leading to potentially higher compensations payable to the agent or distributor.

As a result of the termination of an agency or distributor contract, the agency or distributor may claim certain types of compensation. The most commonly sought type of compensation in such cases is portfolio/goodwill compensation. As dwelt upon in an article from our Fall 2009 Newsletter, entitled "Portfolio Compensation under Turkish Law: Still Fuzzy," Turkish Court of Appeals' decisions do not specifically define the method for determining the amount of portfolio compensation. The precedents only state that an "appropriate" amount should be determined by expert witnesses. For this reason, Turkish scholars often refer to regulations of the Swiss and German Commercial Laws.

Another type of compensation that may be requested by agents and distributors is "loss of profit." This compensation is mostly requested in cases where a definite term contract is terminated by giving prior notice without waiting for the end of the contract's term. Additionally, an agent or distributor may claim compensation for the investments made for activities within the scope of the relevant contract 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 that it has carried out specifically to promote the principal's products. This type of compensation is mostly claimed upon termination of distributorship contracts, since, due to the nature of distributorship contracts, distributors invest more from their own budgets and make more vigorous efforts for the sale of the products.

Finally, as a legal consequence of terminating an agency or distributorship contract, the agent or distributor may claim compensation for non-pecuniary damages. The legal grounds for this compensation are set forth in the general provisions of the TCO. Some agents and distributors claim that their commercial reputation is damaged as a result of termination of their contracts, and request compensation for such non-pecuniary damages. 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 contracts 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 contracts 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 for calculating compensation payable upon termination. With regard to the termination of existing agency and distributorship contracts, parties should be wary of the uncertainties in calculation methods, as these are not regulated by law. Accordingly, negotiating the way out of these contracts, rather than litigating, may prove to be more profitable for both parties.

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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