Goodwill indemnity for distributors (and franchisees?) : recent developments

In Switzerland, franchising and distribution agreements are not the subject of specific regulation. The parties to such agreements enjoy a broad freedom to organize their contractual relationship - and its end – as they see fit. In this respect, franchising and/or distribution agreements often provide that the franchisee/distributor will not be entitled to any indemnity for clientele (also called “goodwill indemnity”) after termination of the agreement.

Such clauses may, depending on the circumstances, turn out to be without effect.

Here is why:

According to legal rules governing agency agreements (also frequently used by brand owners to penetrate new markets), the agent is entitled to an appropriate indemnity for clientele when it has significantly increased the number of clients of the principal and the principal derives an effective benefit from the business relationship with those clients after the end of the contract. The parties may not exclude this right in advance by contract.

In 2008, the Federal Tribunal decided for the first time that an exclusive distributor could be entitled to an indemnity for clientele (subject to the conditions above) in situations where the distributor is integrated in the supplier’s sales network. This is the case when the supplier exercises a broad control over the distributor’s activities and the distributor has a limited economic autonomy, for instance because the distribution agreement include obligations to:

• make minimum annual purchases;
• accept a unilateral change in the price and terms of delivery of the products;
• spend minimum amounts for advertising;
• maintain a certain stock of goods;  
• provide the principal periodically with a series of reports and lists;
• open books and records to the principal;
• communicate to the supplier the names and addresses of clients.

On October 8, 2019, the Federal Tribunal confirmed the view adopted in 2008: a distributor may be entitled to an indemnity for clientele when its economic position is comparable to that of an agent. In this recent decision, the Federal Tribunal reminded that the distributor claiming an indemnity for clientele must prove that its activities significantly increased the clientele of the supplier and that the supplier derives an effective benefit from the business of such clientele after the end of the agreement. In other words, it is up to the distributor to prove that the clients will remain faithful to the brand (i.e. to the supplier), and not to the distributor after termination.

The Federal Tribunal did not specify whether a non-exclusive distributor could also have a claim to a goodwill indemnity, but it did not make the exclusivity a condition of such right.

These two decisions are of great interest for franchisors and franchisees. Even more than distributors perhaps, franchisees are likely to have obligations towards the franchisor that may lead to consider that they are in a dependant economic position. Especially for strong brands, the clientele is likely to be loyal to the franchisor’s brand (and not the franchisee) at the end of the agreement. This means that the validity of contractual clauses excluding an indemnity for clientele could be subject to challenge.

This being said, the 2019 decision suggests that it will be in many cases difficult for the distributor (or franchisee) to satisfy the conditions of an indemnity for clientele. In the concerned case, the cantonal court considered that distributor was not integrated in the sales system of the supplier, despite the distributor’s obligations to buy minimum quantities of goods, undertake promotional activities and provide the supplier reports on sales and stock. The Federal Tribunal left this question open, because it rejected the distributor’s claim on the ground that it had not proved the creation of a real client base from which the supplier could derive an effective benefit after the end of the agreement.

The approach of the cantonal court and of the Federal Tribunal in this recent case show that even though a distributor or franchisee may have a valid claim for a goodwill indemnity, the conditions remain restrictive and the situations where the distributor or franchisee will succeed in meeting them all are likely to remain the exception rather than the rule.

Dr. Anne-Virginie La Spada, Associée, BMG Avocats, Genève