The Supreme Court establishes the net margin as the criterion to be followed for the calculation of compensation for clients in the distribution contract

The Supreme Court has settled the discussion that existed on whether the compensation for clientele should be calculated on the basis of the gross or net margin received by the distributor.

According to consolidated jurisprudence,  article 28 of the Agency Contract Law  (LCA), on occasions, and provided that in the specific case the requirements demanded by said article are met, it can be applied by analogy to grant a distributor compensation for expected clientele for the agent.

However, given that in a distribution contract there are no remunerations such as those received by the agent but rather commercial margins, it was not clear whether the criterion to be taken as the basis for calculating said compensation should be the gross margin (that is, the difference between the purchase price and the resale price), or the net margin (that is, the percentage of profit that the distributor has left after deducting expenses and taxes).

In its judgment 317/2017 of May 19,  the Civil Chamber of the Supreme Court takes up its pronouncements from two previous recent  judgments (judgment 356/2016 of May 30, and judgment 137/2017 of March 1)  to conclude that the criterion to apply is the net profit :

” The judgment under appeal, like the judgment of first instance, correctly applies this jurisprudential doctrine, since it expressly takes into account” those expenses that are necessary to obtain the proceeds of sales (personnel expenses, transportation, financial expenses, and the impact of general expenses), that is, the net profit -difference between the gross profit (income minus operating expenses) and the expenses generated (salaries, amortizations, taxes, interest income) “.”

The judgment thus dismisses the grantor’s argument that denounced the violation of article 28.3 LCA and the jurisprudence that interprets it, in relation to articles 11 LCA (remuneration of the agent) and 1255 of the Civil Code (freedom of agreements), to maintain that the Customer allowance was to be calculated on the basis of the gross income of the distributor.

Section 3 of article 28 of the LCA establishes the maximum that the compensation may reach per clientele : this may not exceed, in any case, the average annual amount of the remuneration received by the agent during the last five years, or during the period of duration of the contract, if it is lower.

The Supreme Court had already ruled on the interpretation that should be given to the concept of remuneration received by the agent in the sense that it should be understood as gross remuneration. That is to say, not the net profit obtained by the agent in the exercise of his activity, but the amount actually received for the service performed.

However, it had also established that  an application by absolute analogy of the rules on unilateral termination of the agency contract to the distribution contract cannot be made, but the particularities of that contract must be taken into account.  Thus, the agent’s remuneration system in  article 11 of the LCA  provides either a fixed remuneration or a commission, while the distributor’s remuneration is governed by other criteria.

Now, the Supreme Court has clarified that  “to establish the amount of compensation for clients, the criteria established in the aforementioned art must be used as a guiding criterion. 28 LCA, but calculated, instead of on the commissions received by the agent, on the net benefits obtained by the distributor ”.

The sentence refers to an exclusive distribution contract of indefinite duration, without notice clause, in which a unilateral resolution is produced by the grantor.

The distributor filed a lawsuit in which it requested that the grantor be ordered to compensate it for the following concepts: compensation for customers, for lack of notice, for stock valuation, for unamortized investments and for unpaid bonuses.

The judgment of first instance partially upheld the claim. It considered it appropriate that the plaintiff was entitled to both compensation for clients (based on the net margin criterion) and that derived from the lack of notice. In addition, it considered that the defendant should take over the stock of the distributor, albeit at cost and not at a sale price as requested.

Both parties filed appeals. The Provincial Court of Madrid dismissed the appeal of the plaintiff distributor and partially upheld the appeal of the grantor, in relation to the compensation derived from the stored stock. The Provincial Court considered that the plaintiff distributor was not obliged to keep a certain quantity of product in deposit, since the distributor firmly bought from the grantor the products that were requested by customers. Therefore, the alleged obligation to repurchase the stock alleged by the plaintiff distributor was not proven.

Finally, the distribution company filed both an extraordinary appeal for procedural infringement and an appeal for cassation. The grantor, for its part, filed an appeal.

Regarding the obligation to buy back the stock by the grantor, the Supreme Court considered that, given the particularities of this case, the distributor was entitled to demand the grantor to buy back the stock. Therefore, it declared that the distributor should be compensated for the damage caused (consequential damage), and coincided with the decision of the court of first instance that the compensation should be calculated in relation to the purchase price of the products in stock, and not at your resale price.