Portfolio compensation under Turkish Commercial Code Article 122 provides fair indemnity to distributors and franchisees who build customer goodwill that continues to benefit the supplier or franchisor after contract termination. Though originally for agency contracts, it applies to long-term, exclusive agreements if certain conditions are met—such as loss of profit and ongoing benefit to the principal. It cannot be waived in advance and must be claimed within one year. While EU law doesn't explicitly extend this to franchises or distributorships, similar rights are recognized in some countries through case law. Legal guidance is key due to financial risks and legal complexity.
Introduction
Portfolio compensation (also known as Goodwill Indemnity defacto), refers to a financial compensation that is most commonly found in commercial agency agreements. In principle, an agent built up a portfolio, creates goodwill and thus broaden the client company's business reach. Consequently, when the business relationship ends, the agent earns a compensation to equitably acknowledge its contributions to the growth of portfolio.1 Therefore, this is not an accustomed indemnity, the rationale is not to compensate the damages but, in a sense, to ensure fairness.
The Scope of Application
Under Turkish law, portfolio compensation is regulated in Article 122 of Turkish Commercial Code ("TCC"). Although the article is substantially based for the agencies, according to Article122/5, portfolio compensation is also applicable to the termination of other contracts that involves continuing performance and grants monopoly right. This can be for instance, franchise, sole dealership, distributorship, trademark license and exclusive sales agreements etc.
This article will examine the portfolio compensation with a particular focus on (i) Distributorship and (ii) Franchise Agreements, primarily within the framework of Turkish law, but also in comparison with the European Union ("EU") legal system.
It is also important to note that, there are no specific legislation directly regulating these mentioned contractual relationships. They are accepted as sui generis (atypical) agreements, as they incorporate various elements from various different contract types.2
1. Portfolio Compensation Arising from Distribution Agreements
A distribution agreement under Turkish law is a contractual arrangement between a supplier and a distributor, where the distributor agrees to purchase goods from the supplier and sell them within a specific geographical territory. The characteristic of this agreement especially lies within its agreed exclusivity terms regarding, the territory, duration, or the obligations of parties. With this exclusivity, the distributor so to speak, becomes a part of supplier company's supply-distribution chain.
Distribution agreements are widely used by both local and foreign businesses, as they are often viewed as a low-risk method of expanding into new markets or territories. The recent increase in foreign investment has led to a corresponding rise in distribution relationships with international suppliers, and, naturally, an increase in instances where such agreements have been terminated. At this juncture, the matter of portfolio compensation becomes crucial. In practice, when the relevant conditions are met, the termination of these agreements frequently results in compensation claims from distributors. For instance, suppliers that are seeking to acquire more direct control over their operations, or those not satisfied with a distributor's performance, often face substantial claims for compensation when attempting to terminate their contracts.
2. Portfolio Compensation Arising from Franchise Agreements
Franchise agreement, gives right to franchisee to operate a business or market a product by using the franchisor's formerly established brand, trademarks, and certain know-how. This arrangement allows businesses (franchisors) to expand their presence with limited investment while having the opportunity to maintain consistent brand standards. It also provides an advantage to enter into local markets through distributors who already have strong understanding of the targeted regions.
This structure is making franchising significantly popular model in industries such as retail, hospitality, and food services. A simple example that supports this can be found in a report conducted in 2023, which revealed that only the 100 companies under study in Türkiye plans to open 4,521 franchise branches by the end of 2024.3
As mentioned earlier, portfolio compensation is also applicable to long-terms contracts that grants exclusive rights akin to agency contracts. In franchise agreements, it is commonly observed that the franchisee is granted an exclusive right within a specific region 4 and in doctrine, it is accepted that the portfolio compensation is also applicable to franchisees.5 Thus, the widespread use of this model also brings the issue of portfolio compensation to the forefront in practice. With thousands of franchise branches set to open, the likelihood of contractual terminations also increases. Thus, as with distribution agreements, the termination of a franchising agreement can trigger significant compensation claims. Without a clear understanding of these claims, franchisors may face substantial financial liabilities.
Conditions and Calculation
The conditions for portfolio compensation are regulates under Article 122 of the TCC. Accordingly, (i) the contract should be terminated, (ii) the Supplier or the Franchisor should still benefit from the portfolio of the customer that the other party has brought, even after the termination, (iii) Distributor/ Franchisee should lose potential profit due to the termination of the contract and lastly (iv) portfolio compensation payment should be fair in the terms of concrete case.
On the other hand, TCC Article 122 does not broadly regulates the calculation of this agreement but it only sets an upper limit: "compensation cannot exceed the average of the annual commissions or other payments received by the agency as a result of its activities for the last five years". Since Turkish law does not provide a specific calculation method, the calculation can be based on case law and/or doctrine. This may often result in inconsistencies and unpredictable outcomes. Thus, given the complexity of these matter, seeking professional legal assistance can be crucial to navigate this process in both cost and time effective manner and to minimize potential financial liabilities.
Cases Where the Right to Claim Portfolio Compensation Does Not Arise
Some situations which the distributor or franchisee is not entitled to claim portfolio compensation from the company are listed below:
- If the conditions outlined in TCC Article 122/1 (mentioned above) have not been met in the concrete case
- If the agreement is terminated with just cause by the Supplier/Franchisor due to the fault of Distributor/Franchisee (Article 122/3)
- If the Distributor/Franchisee has terminated the contract without any act of the Supplier/Franchisor justifying the termination (Article 122/3)
- If the claim for compensation is not made within one year following the termination (Article 122/4). (According to the legislative reasoning of Article 122, this one-year duration should be considered as prescription period. Thus, after this period, the right to claim portfolio compensation is lost).
- Furthermore, -according to the doctrine- if any kind of remuneration has been paid to the agent upon the termination.6
At this juncture it is also important to note that, the right to claim portfolio compensation cannot be waived in advance due to Article 122/4, meaning that it cannot be excluded prior to the conclusion of the contract. As a result, the entitlement to such compensation must be assessed based on the specific circumstances of each case upon the termination of the contract.
Portfolio Compensation under EU Legal System
It is commonly known and accepted that if the agency contract is governed by the law of an EU company, then according to the Article 17 of Directive numbered EEC/86/653 ("EU Directive"), agent can be entitled to acquire the indemnity upon the termination, if the conditions are met. On the other hand, unlike TCC, EU Directive do not regulate a provision that explicitly allows the applicability of this portfolio compensation by analogy to similar contracts in nature. However, distributors and franchisees are also often entitled to claim compensation upon termination of the contract, under the criteria developed in the case law of some European countries.7 For instance, Regional Court of Nuremberg-Fürth decided in 2018 that "the principal owes an indemnity if he has a goodwill i.e.a justified profit expectation, from the business relationships with customers created by the distributor".8 Furthermore, under Swiss law, portfolio compensation can be determined by a court if the parties did not regulate the matter in their agreement and fail to reach an agreement.9 Thus, it becomes evident that portfolio compensation is a widely recognized legal institution also within the EU legal system.
Conclusion
Portfolio compensation can present potential financial challenges for companies involved in distribution and franchise agreements, particularly when terminating such relationships. The absence of a clear method for calculating compensation may lead to inconsistent outcomes, creating uncertainties for businesses. Companies considering termination of agreements, whether due to operational reasons or performance concerns, should be mindful of the circumstances where portfolio compensation claims may arise. However, understanding the legal nuances and ensuring compliance with applicable conditions, such as just cause for termination, can help businesses manage this process more effectively. In this context, professional legal guidance becomes essential to minimize exposure to financial risks.
References
(n.d.). Retrieved from https://iclg.com/
6501 Sayılı Türk Ticaret Kanunu. (2011, 02 14). Retrieved from T.C. Cumhurbaşkanlığı Mevzuat Bilgi Sistemi: https://www.mevzuat.gov.tr/mevzuat?MevzuatNo=6103&MevzuatTur=1&MevzuatTertip=5
Arkan, S. (2021). Ticari İşletme Hukuku. Retrieved from Scribd: https://www.scribd.com/document/784110717/Ticari-I-s-letme-Hukuku-Sabih-Arkan-2021-1
Arslan, K. (2016). Türk Ticaret Kanunu Şerhi. Beta Yayınları.
Decision of Regional Court of Nuremberg-Fürth, Case no. 2 HK O 10103/12. (2018, 11 27). Retrieved from https://www.legalmondo.com/2020/02/germany-distribution-franchise-agreements-goodwill-indemnity-termination/
Franchise 100: 100 Şirket 4 Bin 521 Franchise Şube Açacak. (2023, 10 23). Retrieved from Ekonomist: https://www.ekonomist.com.tr/makale/franchise-100-44607
Kalkmaz , F. (2021, 12 20). Acente, Tek Satıcı ve Franchise Alanın Hakları ve Borçlarının Hukuki Düzenleme Bakımından Karşılaştırılması. Retrieved from DergiPark Akademik: https://dergipark.org.tr/tr/pub/jopem/issue/66335/1018546
Kaya, A. (2018, 10 12). Acentelik ve Tek Satıcılık ile Benzeri Diğer Tekel Hakkı Veren Sürekli Sözleşme İlişkilerinin Sona Ermesi Hâlinde Denkleştirme İstemi. Retrieved from LexPera: https://www.lexpera.com.tr/literatur/derleme-makaleler/acentelik-ve-tek-saticilik-ile-benzeri-diger-tekel-hakki-veren-surekli-sozlesme-iliskilerinin-sona-2/1?utm
Koyuncuoğlu , H. (2016). Analysis of Franchisee's Goodwill Indemnity Claim Before Article 122 Of the Turkish Commercial Code. Legal Hukuk Dergisi, 14(164), pp. https://kkhukuk.com/wp-content/uploads/2016/10/FRANCHISE-_LEGAL-DERGI.pdf. Retrieved from KK Hukuk: https://kkhukuk.com/wp-content/uploads/2016/10/FRANCHISE-_LEGAL-DERGI.pdf
Lexology Distribution & Agency 2023. (n.d.). Retrieved from Buren Legal: https://www.burenlegal.com/sites/default/files/usercontent/content-files/2023%20Distribution%20%26%20Agency_0.pdf
Mantelli, M. (2021, 09 30). International Distribution: Should a Goodwill Indemnity Always be Paid to the Distributor? Retrieved from Mantelli Davini: https://imantelli.eu/en/international-distribution-should-a-goodwill-indemnity-always-be-paid-to-the-distributor/
Overview of the Goodwill Indemnity for Termination of a Distribution Agreement. (2023, 01 24). Retrieved from DigiLegal: https://digilegal.blog/2023/01/24/overview-of-the-goodwill-indemnity-for-termination-of-a-distribution-agreement/
Oyal, A. B. (2024). Hakkaniyete Uygunluk Koşulu Kapsamında Acentenin Denkleştirme Tazminatı Talebinin Doğmadığı veya Tazminat Miktarının Hakkaniyet Gereği Azaltılmasını Gerektiren Haller. Retrieved from DergiPark: https://dergipark.org.tr/tr/download/article-file/3826658
Footnotes
1 (Arkan, 2021)
2 (Koyuncuoğlu , 2016)
3 (Franchise 100: 100 Şirket 4 Bin 521 Franchise Şube Açacak, 2023)
4 (Kalkmaz , 2021)
5 (Koyuncuoğlu , 2016)
6 (Arslan, 2016)
7 (Mantelli, 2021); (Koyuncuoğlu , 2016)
8 (Decision of Regional Court of Nuremberg-Fürth, Case no. 2 HK O 10103/12, 2018)
9 (Overview of the Goodwill Indemnity for Termination of a Distribution Agreement, 2023)
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.
