Judgment of the Federal Supreme Court of 5 July 2022
Case Reference : 4A_180/2022

Facts

The dispute concerned the following (summarized) facts:

A company active in the international trade of machinery and industrial goods, as well as financial and consulting services (the “Distributor”), and a company active in the development, manufacture and trade of machinery and software, and the provision of services thereof (the “Supplier”), entered into an Agreement entitled “Sole Distributorship and Agency Agreement” (the “Agreement”).

The Supplier contracted the services of the Distributor as an exclusive distributor and agent for the Russian national territory. An annex to the Agreement listed a series of machines which included model xxx but not model yyy, the latter being a model which did not exist at the time the Agreement was concluded.

The Distributor’s main obligation was to purchase and resell the products independently “in its own name and for its own account” in the territory assigned to it. Contingent to mutually agreed conditions, the Distributor could act as an agent for the Supplier on a case-by-case basis. With regard to remuneration, the Agreement provided that the Distributor would sell the Supplier’s products with a 25% maximum mark-up in order to cover its expenses and margins. The Agreement also provided that the Distributor would be entitled to its “respective commission” on any pending offers that would lead to a customer order within 6 months of the Agreement’s termination.

On November 8, 2012, the Supplier terminated the contract effective May 15, 2013 and admitted to having sold five model yyy machines directly to Russian customers up until November 15, 2013.

On March 24, 2014, the Distributor initiated debt enforcement proceedings against the Supplier in order to obtain payment of CHF 480’000 with interest, to which the defendant filed an opposition. Following a first legal proceeding, the First Instance Court of Gruyère ordered the Supplier to pay the Distributor CHF 480’000 with interest. The Court held that the Agreement was an agency contract and an exclusive distribution agreement, subject to the rules of Art. 418a et seq. of the Swiss Code of Obligations (SCO), granting the Distributor a commission to which it was entitled to for business concluded without its assistance during the term of the Agreement (Art. 418g para. 1 SCO “the agent is entitled to the agreed or customary commercial agent’s commission or sales commission on all transactions that it facilitated or concluded during the agency relationship and, unless otherwise agreed in writing, on transactions concluded during the agency relationship by the principal without the agent’s involvement but with clients acquired by it for transactions of that kind”). In addition, the Court considered that model yyy machines were covered under the Agreement.

Following the Supplier’s appeal, the Court of Appeal of Fribourg reversed the above ruling and dismissed the claims put forward by the Distributor.

The Distributor filed a civil law appeal with the Federal Supreme Court.

Issue

The issue in this case was whether the Distributor was entitled to a commission on direct sales that were made by the Supplier in the territory granted to the Distributor.

Decision

1. The Conditions of Agency and Distribution Agreements

The Federal Supreme Court recalled the Court of Appeal’s reasoning on the nature of the Agreement and the application of Art. 418a et seq. SCO and reminded the key distinctions between an Agency Contract and an Exclusive Distribution Agreement.

According to Art. 418a para. 1 SCO, an agent is a person who undertakes to act on a continuous basis as an intermediary for one or more principals in facilitating or concluding transactions on their behalf and for their account without entering into an employment relationship with them (Federal Supreme Court judgment 4C.218/2005 of April 3, 2006, para. 3.2).

An Exclusive Distribution Agreement is one by which a person (i.e. the supplier) promises to another (i.e. the exclusive distributor) to deliver specific goods to it at a certain price and to ensure it exclusivity in a given geographic area, in exchange for payment and promotion of sale within said geographical area (Federal Supreme Court judgments 4A_393/2021 of March 4, 2022, para. 6.2.1; 4A_241/2017 of August 31, 2018, para. 3; 4A_61/2008 of May 22 2008, para. 2 unpublished in ATF 134 III 497. As opposed to an Agency Contract, the Distribution Agreement is not subject to a specific legal regulation (Federal Supreme Court judgment 4A_71/2019 of October 8, 2019, para. 4.1.1). The distributor has greater independence since it acts in its own name and on its own account, whereas an agent does so in the name and on behalf of the other party (Federal Supreme Court judgment 4C.130/2004 of June 18, 2004, para. 2.2). In the case at hand, the Distributor purchased the products from the Supplier and resold them in its own name and to its own customers, as provided for in the Agreement.

2. The Will and Intent of the Parties

The Federal Supreme Court analyzed the question of the will and intent of the Parties in response to the Distributor’s allegation that the manner in which the facts had been established by the Court of Appeal were a violation of Art. 18 SCO. According to the Distributor, the Parties had agreed that it was entitled to a commission on direct sales.

According to Art. 1 para. 1 SCO, the contract is perfected when the parties have, mutually and consistently, expressed their will. If the parties have not agreed on all essential elements of the contract, the contract has not been concluded (ATF 127 III 248, para. 3d and the references cited; Federal Supreme Court judgment 4A_553/2020 of February 16, 2021, para. 4.2).

To determine the content of a contract, and whether it has been concluded, the judge shall interpret the parties’ expressions of will (ATF 144 III 93, para. 5.2; Federal Supreme Court judgment 4A_177/2021 of September 6, 2021, para. 3.2).

According to the rules of interpretation of contracts derived from Art. 18 SCO, the judge shall, first and foremost, seek the real and common intention of the parties (subjective interpretation), and, if necessary, empirically, on the basis of clues. Clues are not limited to the content of the declarations of will – written or oral –, but also the (general) context, i.e., all circumstances making it possible to determine the (real) will of the parties. These could include statements made prior to the execution of the contract or facts arising subsequent to its execution, and, in particular, the subsequent conduct of the parties which would highlight their own conceptions thereof at the time.

Lastly, if the judge fails to determine the real and common will of the parties, either because the evidence is lacking or it is inconclusive, or if the judge finds that one party did not understand the will expressed by the other at the time of the contract’s execution–which does not result from the simple fact that it asserts it during the procedure, but shall result from the administration of evidence, the judge shall resort to normative (or objective) interpretation according to the Principle of Trust. In other words, the judge shall seek their objective will by determining the meaning that, according to the rules of good faith, each of them could and should reasonably lend to the declarations of will of the other. This principle makes it possible to impute to a party the objective meaning of its declaration(s) or its conduct, even when it does not correspond to its intimate will. Determining the objective will of the parties in accordance with the Principle of Trust is a question of law, which the Federal Supreme Court is at liberty to review (ATF 144 III 93, Section 5.2.3 and the cited references).

In this case, the Federal Supreme Court concluded that the Court of Appeal had accurately determined the subjective will of the parties without needing to resort to objective interpretation, because in assessing the evidence, it was clear that according to the Agreement, the Distributor’s main requirement was to purchase from the Supplier and to resell the products as an independent party “in its own name and for its own account” in the territory assigned to it and that its remuneration would be based on reselling the products with a 25% maximum mark-up. Thus, the Parties were bound by an Exclusive Distribution Agreement and not by an Agency Contract. The title of the Agreement’s Section 10 related to the remuneration of the Distributor, the “commission rate”, had no bearing on the analysis of the Federal Supreme Court.

The Federal Supreme Court also considered that the Distributor did not claim that the SCO’s provisions concerning the agent’s remuneration should be applied by analogy.

Furthermore, although the Agreement also provided for a case-by-case Agency Contract, the Parties did not agree on the terms of an Agency Contract concerning the products that the Supplier sold directly on the territory assigned to the Distributor, and in particular those relating to the commission.

Following these considerations, the Federal Supreme Court deemed it unnecessary to examine whether model yyy machines were covered under the Agreement.

In conclusion, the Federal Supreme Court rejected the appeal, thereby confirming the judgment handed down by the Court of Appeal of Fribourg.

Key takeaway

This case constitutes an important reminder of the distinctions between an Agency Contract and an Exclusive Distribution Agreement as well as the legal consequences of such distinction. In this case the very title of the Agreement was ambiguous because it referred to both a distributorship and to an agency agreement, “Sole Distributorship and Agency Agreement”.

Comments

This case prompts three important practical comments/takeaways:

1. This case is an interesting and didactical example of the fundamental distinction that is made under Swiss contract law between an agency agreement that is regulated under Swiss contract law (Art. 418a et seq. SCO) and an exclusive distribution agreement which is an innominate agreement to which legal provisions relating to agency agreements do not apply directly even though certain legal provisions may be applied by analogy.

2. Due to the comment above, this case triggers the specific question whether Art. 418g SCO which is applicable to agency agreements may be applied by analogy to exclusive distribution agreements which was not discussed in this case. As mentioned by the Federal Supreme Court, the Distributor did not claim that the SCO’s provisions concerning the Agent’s commission should be applied by analogy in the event the Agreement would be qualified as an Exclusive Distribution Agreement (which is what the Federal Supreme Court decided). One can wonder whether the Distributor could have potentially benefitted from the application by analogy of Art. 418g SCO by relying on a source of legal literature. To the best of our knowledge, the author of this comment is the only author who has suggested the application, by analogy, of Art. 418g para. 2 SCO (which provides that “an agent to whom a particular area or clientele has been allocated exclusively is entitled to the agreed commission or, in the absence of such an agreement, the customary commission on all transactions concluded during the agency relationship with clients belonging to that area or clientele”) to the Exclusive Distribution Agreement (see Kaveh MIRFAKHRAEI, Les indemnités de fin de contrat dans le contrat d’agence et le contrat de distribution exclusive, Basel/Zurich/Geneva 2014, p. 62, N 206). As such, it would have been interesting to have the opinion of the Federal Supreme Court on this issue.

3. According to the Federal Supreme Court, an Agency Contract is one by which a person undertakes to act on a continuous basis as an intermediary for one or more principals in facilitating or concluding transactions on their behalf and for their account without entering into an employment relationship with them. However, the definition of an Agency Contract provided by the Federal Supreme Court is partially incorrect because the agent shall have several agency contracts in order to act for “more principals” (see Kaveh MIRFAKHRAEI, Les indemnités de fin de contrat dans le contrat d’agence et le contrat de distribution exclusive, Basel/Zurich/Geneva 2014, p. 9, N 11, n. 2).

Judgment of the Federal Supreme Court of 4 March 2022

Case reference : 4A_393/2021

Facts

In 2001, two companies entered into a distribution agreement (the “Distribution Agreement”) whereby one of them (the “Distributor”) undertook to distribute the products of the other (the “Manufacturer”) in a specified territory (the “Territory”). It should be noted that the Distribution Agreement made a distinction between “Standard Customer Sales” and “Direct Deliveries”.

From the year 2013, the parties’ relationship experienced some ups and downs. At that same time, the Manufacturer started to distribute its products in the Territory through another company (the “Second Distributor”). The Manufacturer thus worked with two distributors at the same time on the Territory.

On November 16, 2014, the Distributor requested that the Manufacturer terminate its contract with the Second Distributor, which the Manufacturer refused to do.

Over the course of the next year, the Manufacturer notified the Distributor of its intention to terminate their business relationship. In this context, the Manufacturer required from the Distributor the payment of numerous open invoices, but the Distributor declined to pay and instead declared to set-off these invoices with several of its own claims (goodwill indemnity, compensation for accrued commissions, for reimbursement for goods to be returned, and for damages).

Upon the Distributor’s refusal to settle the open invoices, the Manufacturer brought action against the Distributor before the Court of First Instance. In turn, the Distributor requested, by way of counterclaim, that the Manufacturer be ordered to pay a goodwill indemnity. At a later stage of the proceedings, the Distributor modified its prayers for relief and asked for the payment of an additional compensation. The Court of First Instance upheld the Manufacturer’s claim and ordered the Distributor to pay the open invoices. It rejected the Distributor’s goodwill indemnity counterclaim.

The Distributor challenged this ruling before the Court of Appeal, but without success. The Distributor therefore brought the case before the Federal Supreme Court.

Issue

The Federal Supreme Court was called upon to rule on three contentious issues: i) whether the Distributor was entitled to modify the prayers for relief of its counterclaim; ii) whether the Distributor was entitled to set-off its own alleged claims against the claims of the Manufacturer; and iii) whether the Distributor was entitled to a goodwill indemnity.

Because of its very case-specific nature, this commentary will not address the first issue (modification of the prayers for relief) and will focus on the last two.

Decision

As mentioned, the Federal Supreme Court first had to determine whether the Distributor was entitled to set-off its own alleged claims against the claim of the Manufacturer. Indeed, the Distributor disputed the Court of Appeal’s assessment that the parties had agreed to waive the possibility to set-off their respective claims.

The relevant clause of the Distribution Agreement, Art. 7.2, provided that “Claims by the ‘Distributor’ must not be set off against claims by the ‘Manufacturer”. According to the Distributor, the mere fact that this clause did not contain a time limit did not mean that the waiver of set-off was valid for an unlimited period of time. On the contrary, as the waiver of set-off only referred to the current business, a procedural set-off (i.e., a set-off occurring once court proceedings already started) should always be possible.

The Federal Supreme Court observed that the Distributor was right in considering that the context of the entire Art. 7.2 of the Distribution Agreement should be taken into account in order to interpret the meaning of the waiver of set-off. However, the Federal Supreme Court observed that the purpose of Art. 7.2 was precisely to benefit the Manufacturer in the event of a termination of the contractual relationship by providing it with a means of pressure on the Distributor if the latter refused to fulfill its obligations. It would therefore be contrary to the purpose of this clause if the waiver of set-off were to be construed as terminating at the same time as the termination of the contract.

The Federal Supreme Court confirmed that the Court of Appeal had reached the correct conclusion that the Distributor was not entitled to assert its alleged claims by way of set-off. If the Distributor had wanted to assert its alleged claims against the Manufacturer, it should have initiated separate proceedings instead.

The Federal Supreme Court then had to determine whether the Distributor could claim a goodwill indemnity following the termination of the Distribution Agreement.

The relevant provision is Art. 418u of the Swiss Code of Obligations (“SCO”). According to this provision, an agent may claim compensation for clientele if i) his activities have led to a significant increase in the principal’s clientele and ii) the principal derives a benefit from this increase even after the end of the agency relationship.

Art. 418u SCO applies to commercial agency contracts, and not to distribution contracts. However, the Federal Supreme Court has recently recognized (case reference ATF 134 III 497) that Art. 418u SCO can also apply by analogy to exclusive distribution contracts, when the position of the distributor is comparable to that of an agent, in the sense that the distributor can be considered as being integrated in the manufacturer’s distribution system.

The Court of Appeal found that the “Direct Deliveries” had the characteristics of a typical agency contract pursuant to Art. 418a et seq. SCO. Art. 418u SCO would have been directly applicable to the portion of the goodwill indemnity claim arising from this part of the Distribution Agreement. However, as the Distributor had not demonstrated which part of its total turnover corresponded to  Direct Deliveries”, it was not possible to determine a corresponding goodwill indemnity. This aspect of the case was not addressed in more detail by the Federal Supreme Court due to the lack of sufficiently detailed grievances in the Distributor’s appeal.

On the other hand, the Court of Appeal found that “Standard Customer Sales” showed the features of a typical exclusive distribution agreement. However, in the case at hand, the Court of Appeal found that the Distributor’s position was not comparable to that of an agent. In particular, the Court of Appeal had noted that the Distributor and the Manufacturer closely cooperated in the distribution of the products (launching advertising campaigns, carrying out PR programs, maintaining a certain stock of goods, training of sales personnel by the Manufacturer, etc.). However, it had also noted that the Distributor enjoyed a great deal of freedom in important areas (no non-compete obligation, no obligation to send to the Manufacturer the names and addresses of customers, etc.). Thus, the Distributor was not sufficiently integrated into the Manufacturer’s distribution system to be equated with an agent. The Court of Appeal therefore reached the conclusion that it was not justified to apply Art. 418u SCO by analogy to the Distributor. The Distributor challenged this finding before the Federal Supreme Court.

The Federal Supreme Court came to the same conclusion that Art. 418u SCO could not be applied by analogy to the Distributor, but adopted a different reasoning from the one of the Court of Appeal. Indeed, the Federal Supreme Court found that, according to the Distribution Agreement, the Distributor’s status was “non-exclusive”. On the contrary, although the Distributor was de facto the only one active in the Territory, the Manufacturer had expressly reserved – subject to certain conditions – the right to appoint other distributors[1]. The Federal Supreme Court thus stated that what was relevant was not a factual exclusivity, but the existence of a legal exclusivity which would derive from the existence of a contractual obligation of exclusivity that would have been granted by the Manufacturer to the Distributor. The Federal Supreme Court found that the parties had not agreed on such an obligation of exclusivity in this case. For this reason already, it was not justified to apply Art. 418u SCO by analogy to the Distributor. The Distributor was therefore not entitled to a goodwill indemnity.

Key takeaways

This case is of particular interest insofar as it allowed the Federal Supreme Court to revisit and clarify its previous case law (case reference ATF 134 III 497) concerning the application by analogy of Art. 418u SCO to exclusive distribution contracts: a goodwill indemnity can be due only to an exclusive distributor, whose exclusivity must result from a corresponding contractual obligation of the manufacturer. In addition, this case sheds light on the (somewhat unfortunate) effects of waiver of set-off clauses.

Comments

As noted above, this decision offers an interesting development of the case law on goodwill indemnity and exclusive distribution agreements. The topic has attracted quite a bit of interest in the Swiss legal community, so it is worth recalling briefly the evolution of the case law in this regard.

Prior to 2008, Swiss courts considered that a sole distributor was not entitled to claim a goodwill indemnity as they held that the compensatory mechanism of Art. 418u SCO – tailored to the commercial agency contract – should not be applied by analogy to an exclusive distribution contract. Indeed, it was deemed “new and exceptional in the civil law system that a party who has performed all his obligations must compensate his co-contractor for the benefits he derives from the performance of the contract after it has ended”, and that therefore “this controversial innovation [i.e., the clientele compensation] cannot be extended” (cf. notably ATF 88 II 169 and SJ 1970 33). However, the Federal Supreme Court expressly reserved particular cases where “the supplier, for example, reserves a very broad right of control and obliges the representative to integrate himself into his sales organization, to provide him with information or to transfer his customer base to him at the end of the contract” (cf. ATF 88 II 169).

Such a particular case had not been recognized until ATF 134 III 497. In this decision, the right to a goodwill indemnity was granted to the exclusive distributor because, among other factors, the distributor was contractually obliged to make minimum purchases, was obliged to invest in advertising campaigns, was obliged to maintain a certain stock of goods, and was obliged to communicate to the supplier a list with the names and addresses of the customers. In view of all these obligations, the Federal Supreme Court found that it was justified to grant the distributor the same protection as an agent.

This decision was later confirmed by the Federal Supreme Court case law. However, subsequent court decisions have highlighted the remaining uncertainties relating to the granting of a goodwill indemnity to exclusive distributors. For instance, in a 2018 decision, the Federal Supreme Court rejected the allocation of a goodwill indemnity to an exclusive distributor on the grounds that the distributor had not alleged the relevant facts allowing the calculation of the indemnity (case reference 4A_27/2018). Similarly, in a 2019 decision, the Federal Supreme Court rejected the allocation of such an indemnity on the grounds that the exclusive distributor had not demonstrated that it had built up a clientele for the supplier (case reference 4A_71/2019). In both cases, the Federal Supreme Court did not analyze whether the specific conditions for an application by analogy of Art. 418u SCO to a an exclusive distribution contract were met.

Here too, the Federal Supreme Court avoided to analyze whether all the conditions for an application by analogy of Art. 418u SCO were met. The unwillingness to deal with this specific question perhaps betrays a certain discomfort on the part of the Federal Supreme Court with the criteria which it itself set out in its case law ATF 134 III 497 to determine whether or not the situation of the distributor was comparable to that of an agent (namely, the obligation for the distributor to carry out an annual minimum of purchases, to maintain a certain stock of goods, to grant a right of inspection in its books to the supplier, to communicate to the supplier a list of customers, etc.). It should further be noted that the analysis of the Court of Appeal on these aspects (quoted extensively in recital 6.1.2) does not lead to a clear-cut conclusion: on the contrary, in view of the circumstances of the case, it seems to us that the Court of Appeal could just as well have concluded that the Distributor’s situation was comparable to that of an agent. This demonstrates the difficulties linked to the implementation of such indefinite criteria.

Regardless of these considerations, it seems that this decision could have offered the opportunity to look into the question, little discussed to our knowledge, of the application by analogy of Art. 418u SCO to non-exclusive distribution contracts. Indeed, if an analogy between a sole distributor and an agent is justified because of the potential link of control and dependence that may be created between a distributor and a supplier (cf. also Dreyer Dominique, Contrats de distribution : deux questions, in Pichonnaz Pascal/Werro Franz, La pratique contractuelle 3, Genève 2012, p. 135 et seq.), it is difficult to see why the non-exclusive distributor should be excluded a priori from the protection of Art. 418u SCO, since a non-exclusive distributor could very well be integrated into a distribution network and find himself under the influence of the manufacturer.

One can further note that in this case the possibility for the Manufacturer to appoint additional distributors in the Territory was subject to certain conditions. It is therefore not so much the legal qualification of an exclusive or non-exclusive distribution contract that should be decisive for the assessment of the right to a goodwill indemnity, but rather the actual position of the distributor vis-à-vis the supplier.

This case could have offered the opportunity to analyze more precisely the meaning of the contractual provision relating to the issue of the exclusivity. The very detailed provision (Ar. 2.2 of the Distribution Agreement quoted in footnote) indicates that the Manufacturer did not have full freedom to appoint other distributors unless certain objective conditions would be met. The relevant clause provides indeed that: “At the time of entering into this contract, the ‘Manufacturer’ has no intention to nominate further distributors or agents for the sale of ‘Products’ in the ‘Territory’. However, he may do so in the event that the ‘Distributor’ is not in a position or willing to represent the ‘Manufacturer’s’ interests regarding all the ‘Products’ in the ‘Territory’. The Manufacturer will especially consider such a step if he encounters a risk to lose business or his market position regarding the ‘Products’ in the ‘Territory’”. This could have been used as an argument to establish that as long as these conditions were not met, the former distributor did indeed have a contractual exclusivity in the relevant territory. From this perspective, one could consider that the distributor did benefit from a certain exclusivity, even if is was limited.

Let us add a comment concerning contractual clauses prohibiting the parties from offsetting their reciprocal claims.

The possibility for two parties to set-off mutual claims is expressly provided for in Art. 120 para. 1 SCO. This possibility is recognized even if the offsetting claim is disputed (Art. 120 para. 2 SCO). However, freedom of contract allows the parties to waive their right to set-off (Art. 126 SCO).

In the case at hand, the parties had agreed to a waiver of set-off in favor of the Manufacturer, i.e., the Distributor could not set-off its claims against the Manufacturer’s claims. However, as shown in this decision, the wording chosen by the parties, although seemingly straightforward, may raise questions of interpretation, particularly in relation to the time limit of the waiver. Here, both the Court of Appeal and the Federal Supreme Court came to the conclusion that the waiver of set-off should continue to have effect not only after the end of the contractual relationship (which can be justified on logical grounds), but also after the commencement of legal proceedings, which – as the Federal Supreme Court itself conceded – does not seem to be adequate to achieve effective proceedings. Indeed, by preventing the Distributor from offsetting its claims, it is forced to take them to court and to initiate a second procedure.

To avoid any uncertainty in this regard, it seems advisable for the parties negotiating a waiver of set-off to address the question of its time limit and to expressly implement their decision into their agreement.

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[1] Art. 2.2. of the Distribution Agreement provides that: “The status of the ‘Distributor’ is ‘non-exclusive’. At present he acts as the only distributor in the ‘Territory’ for the ‘Manufacturer’ for all ‘Products’. At the time of entering into this contract, the ‘Manufacturer’ has no intention to nominate further distributors or agents for the sale of ‘Products’ in the ‘Territory’. However, he may do so in the event that the ‘Distributor’ is not in a position or willing to represent the ‘Manufacturer’s’ interests regarding all the ‘Products’ in the ‘Territory’. The Manufacturer will especially consider such a step if he encounters a risk to lose business or his market position regarding the ‘Products’ in the ‘Territory’ (…)”.