November 2006

EXCLUSIVE SELLING CONTRACTS

    In parallel with the international developments at the commercial arena, volume of world’s trade is also expanding. Therefore, countries are moving towards to create common economical targets. “Exclusive Selling Contract” is a typical contract which enables easier transfer of goods and products to foreign markets.

    With the help of Exclusive Selling Contract, exports to a certain country can be conducted via a sole distribution center located there. In a few words, the commercial relationships are sustained by a sole buyer at the country of export. The buyer undertakes many risks and becomes the branch of the producer at the contract’s implementation country.

    After this brief explanation, before defining the Exclusive Selling Contract, we should clarify one point: There is not an exact definition of Exclusive Selling Contract neither in Turkish Law nor in other law systems. However, depending on the definitions proposed by the doctrine and can be found in some Turkish Supreme Court judgements, we may suggest the following:

    “Exclusive Selling Contract is a type of continuous contract of frame nature between the producer (manufacturer/exporter) and exclusive seller, in which the producer undertakes the liability of sending any or all of his goods to be exclusively sold by the exclusive seller at a certain geographical region and in return, the exclusive seller undertakes the liability of acting towards distribution’s and sales’ improvement, by selling the goods on his behalf and account.”

    As a result of aforementioned definition, the elements of the Exclusive Selling Contract might be listed as follows:

1. Providing sales monopoly to a certain location,

2. Being a contract which leads to continuous and regular liability,

3. Exclusive seller sells the goods subject to the contract on behalf and account of himself, on the other hand, he is integrated with the distribution network of the producer,

4. Exclusive seller’s liability to act towards distribution’s and sales’ improvement.

    If we comment on the legal nature of contract in the context of aforementioned elements, we might conclude that it is neither a sales contract, a pre-contract nor an agency contract. Quite the contrary, Exclusive Selling Contract has a frame contract’s qualities, which settles all commercial relations between the parties. Therefore, in addition with granting the exclusive seller to sell the goods at the location determined by the contract, the producer is liable to refrain from making direct sales to that location or having the goods sold by third parties, which forms an incongruity with the competition law. In return, the exclusive seller is obliged to improve the sales by accelerating the launches. These rights and liabilities form the subject of the frame contract between the parties of Exclusive Selling Contract. On the other hand, the producer is entitled with the right and liabilty of delivering the goods to exclusive seller and accordingly, the exclusive seller is liable with accepting the delivery of goods and defray the costs. The rights and obligations of this phase are about the implementation stage of the contract.

    While settling the contract, the parties are free to determine the terms and conditions under the liberty of contract, but they should obey the legal restrictions. Consequently, under Article 11/1 of Turkish Obligations Code, the liberty of contract principle is also effective for the Exclusive Selling Contracts. In practice, such contracts are usually acted in statutory form, but they can also be acted implicitly or verbally. Considering the provision of Turkish Code on Civil Procedure, which states that the existance of a transaction whose subject exceeds 400 New Turkish Liras can only be proven by conclusive evidence, to overcome probable confirmation issues, acting such a contract in statutory form would be better. Otherwise, many difficulties would be faced when determining the content of an implicit contract.

    From the competition law’s point of view, we might easily claim that Exclusive Selling Contracts have a competition restricting effect. Because, with the settlement of an Exclusive Selling Contract, the commercial relations of parties with the third parties are blocked. For example, when an exclusive seller is granted to act at a certain region (that is, the exclusive area protection), the exclusive seller becomes the sole marketer of that region. In this case, the goods subject to Exclusive Selling Contract cannot be marketed at that region by other distributors or the producer himself. Therefore, while acting an Exclusive Selling Contract, the provisions of competition law should also be taken into consideration. Otherwise, the contract might be unlawful. So, to prevent the Exclusive Selling Contract, which has an international quality, being incompatible with the competition law, the restrictions and exemptions at the communiques of European Union and the provisions of Act No. 4054, on Protection of Competition should be taken into consideration.

    In an Exclusive Selling Contract, both the producer (or exporter) and the distributor (exclusive seller) makes big investments, therefore the contract should be terminated in a manner which does not affect the other party; that is, the contract should not be terminated in any time or unlawfully. The need to overcome the possibility of great damages in case of a termination leads to the continuity of such contracts.

    As a matter of fact, the Exclusive Selling Contracts cause regular incurring of debts, so they can be acted for a definite or indefinite time. In case they are indefinite, both parties are entitled to terminate the contract by using their ordinary annulment rights. However, if the contract is acted for a definite time, parties may terminate the contract only by using their extraordinary annulment rights. Between the probable reasons for using the extraordinary annulment right, the violation of sales monopoly by producer (exporter/manufacturer) or exclusive seller’s acting on behalf of another producer (exporter/manufacturer) at the area, where is allocated to himself, can be mentioned..

    In case the Exclusive Selling Contract is terminated due to a reason mentioned above, upon Article 96 of Turkish Obligations Code, the opposite party has right to claim equalization compensation for the breach of the contract. This compensation corresponds to the damages which are arisen due to the violation of contractual obligations. Besides, the exclusive seller may claim a compensation for losing his circle of customers and facing financial difficulties, under the fairness principle. This matter is explicitly formulated at the Belgian Law, however in German Law, such a compensation is included in the provisions about agency contract and for exclusive sellers, these provisions may be implemented by way of analogy. In Turkish Law, no compensation might be claimed for the loss of circle of customers.

    As it is already mentioned, the “Exclusive Selling Contract” might lead some difficulties in finding the exact provisions to be implemented, due to its peculiarity and lack of specific provisions in Turkish Law. These problems might be solved by analogy or judge’s legal creation under Article 1st of Turkish Civil Code. According to the rules on bilateral contracts, the provisions to be implemented for the Exclusive Selling Contract are found by deductive reasoning of provisions on sales, agencies and civil law partnerships. Furthermore, the Exclusive Selling Contract leads to a debt relationship, therefore the general provisions of Turkish Civil Code and Turkish Obligations Code are also applicable to the contract between parties. In general, the parties of such contracts are merchants; so, the general provisions of Turkish Commercial Code are also applicable.

    Due to the Exclusive Selling Contracts’ important place at the improvement of international trade, the lack of specific regulations lead to troublesome cases. Especially, determination of the applicable law has great importance, considering its international quality. The parties usually solve such issues by predetermining the applicable law at the contract; if it is not predetermined, upon Article 24 of Turkish Code on International Civil Procedure, applying the law of place of performance, if there is more than one place of performance, applying law of place of predominant performance, if the place of predominant performance is not determinable, applying the law of place where is most closely connected with the contract. Of course, in such cases, the relation of the characteristic performance of the contract with the parties should be determined. In our point of view, the law of exclusive seller’s center of activities should be applied for the characteristic performance of the contract. However, if there is another law than Turkish Law, that is more closely related with the matter, due to the lack of a positive legislation for the application of such law, the law of exclusive seller’s center of activities has more importance.