Turkish Law Blog
Distributorship Agreements Under Turkish Law
I. Legal Standing of Distributorship Agreements
Distributorship agreements do not have a clear definition under Turkish law and are therefore a complex and unique type of agreement. They can be generally defined as agreements allowing for the distribution of produced goods to customers and end users, where the manufacturer of a specific good agrees with a third party to distribute the said products/goods in a specific region. However, a distribution agreement differs from a standard purchase/sales agreement as the distributor’s role is not limited to simply purchasing the products from the manufacturer and selling them to customers or end-users. Instead, in a distribution agreement the distributor is actually incorporated into the distribution chain of the supplier/manufacturer, while conducting transactions on its own behalf (and therefore is not a representative of the manufacturer).
II. Legal Provisions Applicable to Distributorship Agreements
Since distributorship agreements are not regulated or otherwise recognized under separate provisions within the legislation, determining the applicable legal provisions and clauses to these agreements can sometimes be challenging. As it stands, clauses and provisions applicable to distributorship agreements are determined by way of interpretation and reference of other laws as gap-fillers. To illustrate this with an example, since a distributorship agreement is, at its core, a debt-credit relationship, disputes arising from distributorship agreements may be resolved in conformity with the general provisions of the Turkish Civil Code and the Turkish Code of Obligations as gap-fillers (statutory analogy). In cases where both parties are deemed as merchants (as is the case in most distributorship agreements), the relevant provisions of the Turkish Commercial Code may also be applicable to the dispute. Additionally, since the relationship between the manufacturer and the distributor resembles an agency relationship, the provisions of the Turkish Commercial Code regarding agent’s agreements may also be applied to certain disputes, depending on the merits of the case.
III. The Importance of the Duration of the Agreement
A distributorship agreement can be executed for a fixed duration (as in for a limited time, such as 5 years), or for an indefinite duration. This difference between durations of the agreement will have differing consequences for the agreement, especially for termination proceedings. Therefore, it is crucial for all parties to weigh the pros and cons of both duration types, and decide which duration type they want to proceed with (either a fixed or indefinite duration), taking into account the specifics of the commercial relationship between the parties and the nature of the transaction.
In a fixed duration distributorship agreement, the parties can enter into a commercial relationship with the intention of it expiring after a certain amount of time passes. Therefore, agreements with a fixed term will expire automatically and without the need for an additional declaration by to this effect, once the agreement term expires. Alternatively, the agreements may include provisions stating that the agreement will be extended/renewed unless one of the parties terminates the agreement in writing before the renewal period. These types of agreements are deemed agreements with indefinite terms.
It is also possible for the parties the renew/extend the agreements implicitly, without expressly declaring their intention to do so. So in cases where neither party submits a written declaration or proposal for the extension of the term at the end of the agreement term, but both parties continue place new orders, transfer payments and deliver goods as if the agreement is still in effect, will constitute an implicit renewal/extension.
IV. Termination and Possible Ramifications
The consequences and ramifications of early termination of a distributorship agreement will differ, depending on the type, duration, and the specific clauses of the agreement. For agreements with an indefinite duration, the termination notice period is especially important, as this can play a crucial role in protecting the rights of both parties.
a. Termination of Distributorship Agreements
As noted above, termination procedures will differ, depending on the type and the duration of the agreements. For example, distributorship agreements with a definite duration will automatically expire at the end of the agreement term, whereas those with an indefinite term do not necessarily have an end of term date specified. Instead, agreements with an indefinite term may be terminated with a notice of termination by either party, which triggers the termination notice period as noted within the agreement. It should be noted that agreements with a fixed term may also be terminated via this termination notice period method if the agreement includes specific clauses to this effect.
A termination notice period usually stipulates that the terminating party must issue a notification regarding the termination to the other party, which will trigger the termination notice period, during which the agreement will continue to remain in full effect until the notice period ends. Therefore, determining the duration of the termination notice period is extremely important in protecting the rights of the parties in case of an untimely termination. It is generally advised to explicitly note the total duration of this notice period within the agreement itself in order to avoid any possible complications in the future, as the law does not provide for a minimum notice period duration for distributorship agreements where the agreement does not expressly state the duration. Some argue that in such a cases, the 3-month termination notice period provided for agency agreements at the law should also be applied as a gap-filling provision to distributorship agreements, where others argue that a 3-month period will be insufficient to protect the rights of the distributor, due to the differing nature of distributorship agreements. It should be noted that the Court of Appeals does have precedents where it ruled that a 3-month notice duration is not sufficient and that a 6-month termination notice period is much mora suitable for distributorship agreements.
b. Issuing a Termination Notice and Ramifications
Understanding the legal nature of termination notices is also crucial, as issuing a notice to the other party may have unintended consequences. It is especially important for all parties to understand the consequences before making a rash decision to issue a termination notice to the other.
The issue here arises from the formative right nature of the termination notice. A formative right means a right/action that immediately creates a new and separate legal situation once it is exercised by the relevant party. Since these rights create new legal situations, they are also irrevocable in nature, making it impossible for the relevant party to revoke, revert or otherwise cancel the right/action once it is exercised. Due to this fact, the right to issue a termination notice will expire once it is exercised and will have irrevocable consequences due to its formative right nature.
In layman’s terms, if one of the parties issues a termination notice as per the relevant distributorship agreement to the other, this termination notice will be irrevocable and the issuing party cannot revert this termination decision claiming that they no longer want to terminate the contract. Once the termination notice is issued, it will trigger the termination notice period and the agreement will terminate automatically at the end of this termination period as determined in the relevant agreement.
V. Possible Distributor Claims Following Early Termination
As mentioned above, the termination proceedings will differ depending on the type and the duration of the distributorship agreement. Furthermore, the rights and claims of the parties following an early termination may also differ, with clear differences between exclusive and non-exclusive distributorship agreements.
1. Inventory Buyback
In cases where the distributor is required to keep additional stocks during the agreement term for the purposes of ensuring a steady supply of the relevant goods to the relevant market, the distributor may claim that the remaining inventory items (excess stock items) be bought back by the supplier/manufacturer, as these can no longer be sold by the distributor due to early termination. It should be noted that as a rule, the supplier/manufacturer is required to buyback these excess inventory items even if there no provisions included within the agreement to this effect. However, it is also possible for the parties to include a provision stating otherwise, releasing the supplier from this buyback obligation.
2. Compensation for Investment Costs
Distributorship agreements usually require the distributors to make investments to implement a secure and efficient supply chain and for the marketing of the products within the relevant region. These investments can add up to large sums depending on the product to be distributed, and early terminations of distributorship agreements may result in losses as the distributor may not have had enough time to recover these investment costs. In such cases, the distributor may also claim a compensation for these unrecovered investment costs, provided that it can prove that the duration of the agreement (until termination) was not sufficient to recover such.
3. Compensation for Unfinished Works
It may also be possible to claim compensations for unfinished works as per Article 121 of the Turkish Commercial Code. However, the right to claim this compensation will differ depending on the duration of the agreement. If the agreement is for a fixed duration, this compensation may only be claimed in cases of unjust early terminations. Whereas for indefinite term agreements, it can only be claimed if the agreement was terminated without adhering to the termination notice period.
4. Compensation as per General Provisions of the Turkish Code of Obligations
If the supplier/manufacturer terminates an indefinite distributorship agreement without a just cause, the distributor may also claim compensation for the loss of profits because of this unjust termination, as per Article 96 of the Turkish Code of Obligations. The duration to considered for profit loss shall also correspond with the minimum termination notice periods, as noted above in section IV-a, between 3 and 6 months.
5. Equalization Compensation
The final compensation a distributor may claim from the supplier/manufacturer is equalization compensation, which covers compensation for the additional benefits that will be provided to the supplier/manufacturer as a result of the wide distribution network established by the distributor. However, it should be noted that this compensation is only available for exclusive distributors and will not be applicable for non-exclusive distributorship agreements.