Section 15: Competition law

1 Introduction
Competition law is a set of legal rules which purpose is to promote or maintain market
competition by regulating, restricting or prohibiting anticompetitive behaviours by companies
or businesses.
Underlying assumption is the existence of real and effective competition between
companies/businesses is one of the basic and essential elements of the market economy: it
encourages companies to offer goods and services at the most favourable terms, and motivate
them to pursue efficiency and innovation and reduce prices. Outcome: good for final users and
consumers.
Two main groups of rule and regulations:
1) Rules restricting or prohibiting anticompetitive behaviour with substantial effects on the
economy or a particular market or industry  Competition law. Controlled by the
authorities (European or national authorities) when they find out.
2) Rules prohibiting wrongful business practices by companies / business that may unfairly
harm its competitors and/or the final consumers  Unfair Competition law. Controlled
by the courts if competitors or consumers bring a claim and start legal proceedings.

2 Competition law
In the European Union: EU law (with competent EU authorities and courts) and National laws (
with competent national authorities and courts)  based on the rules of EU law.
The rules of Competition law cover and refer mainly to the following 4 topics and situations:
A) Anti-competitive conducts or behaviour
General rule: prohibition of agreements or arrangements between two or more independent
market operators with the purpose or effect preventing, restricting or distorting competition.
This cover both:
 Horizontal agreement (between competitors operating at the same level of supply
chains)
 Vertical agreements (between firms operating at different levels)
Cartel: the clearest example of illegal conduct between competitors.
 A group of similar and independent companies which join together to fix prices, limit
production or share markets or customers between them  less incentives to provide
new or better products and services at competitive prices. Consequence: clients end up
paying more for the same or less quality.
 Cartels are illegal and subject to very high fines on the companies involved in a cartel.
Also, other competitors and consumers might claim compensation for damages
suffered.
 Generally, highly secretive. Evidence of their existence very difficult to find. That is why
authorities have to put in place a ‘leniency policy’.
 Lenience policy: companies that confess and provide information about a cartel in which
they participate may receive full or partial immunity from fines.
 Total immunity: a company must be the first one to inform the authorities of an
undetected cartel, providing sufficient information to allow an inspection at the
premises of the companies allegedly involved in the cartel. The company must also
 fully cooperate with the authorities throughout the procedure, provide all
evidence in its possession and put an end to the infringement immediately.
 Partial immunity: companies which do not qualify for immunity may benefit from
a reduction of fines if they provide evidence that represents “significant added
value” to that already in the authorities’ possession, and have terminated their
participation in the cartel. The first company to meet these conditions is granted
30 to 50% reduction, the second 20 to 30% and subsequent companies up to 20%.

B) Abuse of a dominant position in the market

General rule: companies holding a dominant position on a specific market may not abuse of
the position.
Main doubt: What ‘dominant position’ means? Not clearly defined by law. According to EU
case law: position of economic strength in a defined market that allows a company to behave
without taking into consideration its competitors and the decisions of the consumers.

C) Control of mergers or combinations

General rule: Mergers or other transactions where a business / company is acquired by
another or two or more businesses / companies are combined, are subject to control by
authorities:
1) By the national or the EU authorities, depending on the size of the businesses and
where they have activities.
2) Pursuant to such control, the merger or combination may (i) authorized/approved
without conditions, (ii) prohibited or (iii) approved with conditions.
Why the control?
 Mergers can be positive (allow companies to develop new products more efficiently or
to reduce production – consumers benefit from higher quality goods at fairer prices).
 Some mergers may reduce competition in a market, usually by creating a dominant
player – this is likely to harm consumers through higher prices, reduced choice or less
innovation.
Which mergers are controlled by national authorities?
 Turnover / sales threshold(порог): if the global turnover in Spain for all companies
involved exceed €240 million in the last accounting year, provided that at least two of
the participants achieve an individual turnover in Spain of more than €60 million.
 Market share threshold: when, as a consequence of the transaction, a share equal or
higher than 30% of the relevant product or service market at a national level.
When is a merger prohibited?
If it will significantly prevent or limit the effective competition in the relevant market.
Example: when the merging parties are major competitors in the market.
When is a merger approved with conditions?
Even if a proposed merger could distort competition, the parties may commit to take actions
to try to correct this effect or the authorities may impose such actions. If the authorities think
that those commitments will maintain or restore competition in the market, they may
approve the merger.
D) Control of ‘state aids’
General rule: prohibition of any financial or similar aid provided by the governments to
private companies that may distort competition and trade within the EU, by favouring certain
companies or the production of certain products.
 ‘State aid’ is defined as any kind of advantage in any form whatsoever provided by
public authorities to companies on a selective or individual basis.
 Subsidies granted to individuals or general measures open to all companies are not
covered and do not constitute State aid.
Exceptions: Since, in some circumstances, government interventions are necessary for a well-
functioning and equitable economy, the EU and national laws leave room for a number of
situation where State aid is not prohibited.
3 Unfair competition law
General rule: Prohibition of any action carried out by a company that is objectively contrary to
the principle of good faith and distorts / may distort significantly the economic behaviour of the
end users.

Specific unfair competition actions prohibited by law

1. Actions addressed to one specific competitor
 Defamation  public statements about competitor that may harm its reputation in
the market, unless they are true, accurate and appropriate.
 Public comparison  comparative advertising or other public comparative statements
referring explicitly or implicitly to one competitor.
 Imitation  copying products of a competitor. Note: in principle, imitation is free
unless competitor has an exclusive right, e.g. a patent or copyright.
 Taking unfair advantage of a competitor’s reputation.
 Violation of business secrets of another company.

2. Actions contrary in general to the proper functioning of the market

 Misleading advertising: providing vague or incomplete information, which is not clear
is difficult to understand.
 Aggressive practices, such as harassment of consumers.
 Exploitation of situation of economic dependence of consumer or supplier to impose
unfair conditions.
 Sale below cost.
 To break a commercial relationship without prior notice.
 Any kind of illegal advertising.
Section 16: Intellectual property
Trademarks
A) Introduction
Intellectual Property rights are rights recognized by the law in relation with creations of the
mind: inventions, literary and artistic works and symbols, names, images and designs used in
commerce. IP rights are intended to protect the creativity of businesses and individuals. IP is
divided into two categories:
I. Industrial property: trademarks, inventions, industrial designs.
II. Copyright: rights granted on literary and artistic works such as novels, poems.

B) Concept
Trademark (TM): from a legal standpoint, a trademark is a distinctive sign which serves to
identify the origin of goods / products of one company and to differentiate them from those of
other companies in the markets.
Trade names and domain names may also be considered distinctive signs. Other things that
can be considered as TM include the shape of a product, packaging, audible signs such as
music or vocal sound. To get protection, a TM must be registered, at the Spanish Patents and
Trademarks Office in Spain.
C) National, CTM and International trademarks
1. National TM: application and registration process in one country. Grants protection only in
such country.
2. CTM: TM valid across the European Union, registered with the EU organization in
accordance with the EU Regulations on the CTM.
 Valid for 10 years and can be renewed indefinitely
 Simplicity: one registration procedure, one application, one language, one
administrative centre.
 More expensive that individual national trademarks, but still reasonable cost.
3. International TM: process that offers the possibility to have a TM protected in several
countries by simply filling one application directly with a national or a regional trademark
office.
 Valid for 10 years and can be renewed indefinitely
 Registration is analysed and granted by each country designated in the application
where protection is sought.

D) Prohibitions
Absolute grounds for refusal:
a) Signs which do not satisfy the general requirements for being a TM
b) Trademarks which are devoid of any distinctive character
c) Trademarks which are contrary to public policy or to accepted principles of morality
d) Trademarks which have not been authorized by competent authorities

E) Rights of trademark owners

Which rights do I get registering my TM?
1. Exclusive rights to use and exploit TM
2. Right to prohibit non authorized third parties from using an identical or similar TM for
the same or similar products
3. Right to object the registration by a third party of a TM which may be confused with its
own TM
Which actions can I prohibit from anybody else?
The rights under 1. Above entails the right to prevent all third parties not having his consent
from using in the course of trade:
a) any sign which is identical with the TM in relation to goods or services which are
identical with the TM is registered
b) any sign where, because of its identity with, or similarity to, the TM and the identity or
similarity of the goods or services covered by the TM
c) any sign which is identical or similar to, the TM in relation to goods or services which
are not similar to those for which the TM is registered
If the above conditions are met, the TM owner may prohibit third parties from:
- affixing the sign to the goods or to the packaging thereof;
- offering the goods, putting them on the market or stocking
- them for these purposes under that sign, or offering or
- supplying services thereunder;
- importing or exporting the goods under that sign;
- using the sign on business papers and in advertising;
- use the sign on the internet and as domain name;
When will I start being protected?
The rights conferred by a community trade mark shall prevail against third parties from the
date of publication of registration of the trade mark. Reasonable compensation may, however,
be claimed in respects of acts occurring
Main legal actions available
The TM owner will be entitled to request before the courts of law:
1. The cessation of the actions that entailed a violation of its TM;
2. An indemnification for the damages suffered because of the third party violation;
3. The adoption of all necessary measures to ensure that the third party stops the violation

F) Term and expiration

The validity and duration of protection of the registered TM is 10 years. However, it may be
renewed indefinitely for further 10 year periods.
Only two requirements for maintaining your rights over the TM:
 Express renovation of the TM registration, paying the applicable fees
 Effective and real use of the TM in the market for the products or services for which it
was registered.
G) Sale/license
A TM can be sold to a third party or can be licensed to a third party. In practice, TM licenses
are very common and relevant for the operation of many businesses. The TM owner (licensor)
authorizes a third party (licensee) to use the TM for an agreed price or fee (royalty). The
ownership rights are retained by the licensor.
The license may:
 Refer to all products and services for which the TM is registered or only for some of
them
 Refer to the entire territory where TM has protection or to only part of the territory
 Be exclusive or non exclusive
Any sale or license must be registered at the relevant Registry.
H) Trade names
Name that is used by a company in the market to be differentiated from other companies and
businesses. Does not offer protection as TM, if necessary, it must also be registered as a TM.
I) Domain names
Sign or name that may identify a company or business on the internet.
Legal rules have been put in place to regulate the assignment of domain names, regulate the
relationship between domain and names and other distinctive signs, and regulate and resolve
possible conflicts between domain names and identical or similar trademarks or trade names.

Patent
A) Concept
Legal title conferred by a government or public administration granting its holder the right, in a
particular country or region, and for a certain period of time, to use and exploit an invention
on an exclusive basis, and to prevent third parties from exploiting the invention for commercial
purposes without authorization.
An invention can be patented:
I. On a National basis, in one country or in different countries following separate national
application processes.
II. On a European level, following the process and rules of the European Patent
Convention
III. On an International level, flowing the process and rules of the Patent Cooperation
Treaty

B) Concept of Invention and patentability

There is no clear definition of what an invention is, however, patent laws set out certain
requirements that an invention must meet in order to be patentable and do provide a non-
exhaustive list of subject-matter and activities that may not be regarded as inventions.
1. Patentability requirements
Most patent laws provide that patents can only be granted for inventions that are new, involve
an inventive step and are susceptible of industrial application. An improvement of an existing
invention can also be protected through a new different patent. The improvement itself will
need to be new and involve an inventive step, resulting in the improved product being
substantially better than the original one.
2. Not patentable
According to the law, certain subject-matter and activities that may not be regarded as
inventions, and therefore are expressly excluded from patentability. In this respect your
attention is particularly drawn to the following four fields:
 Programs for computer
 Methods for treatment of the human or animal body by surgery or therapy and
diagnostic methods practiced on the human or animal body
 Plant and animal varieties and essentially biological processes for the production of
plants of animals
 Contrary to public order or morality

C) Patent rights
 Exclusive right to use and exploit the invention
 Right to prevent third parties from using or exploiting the invention / patent, except:
 Private / domestic use
 Use for scientific / research purposes

D) Patent obligations
 Pay the annual fees to the relevant government or public authority.
 Use / exploit the patent, either by the owner of the patent. This obligation entails the
duty to start exploiting the patent within a specific term after filling the application,
and a specific term after publication of the granting of the patent. The patent must be
exploited in a sufficient number.
If the use / exploitation obligation is not complied with (because of no use or
insufficient use), the patent owner might have a risk of losing the patent or being
obliged to grant licenses to third parties that may exploit the patent.

E) Ownership of the patent

The patent ownership typically belongs to the inventor. Doubts may exist as regards ownership
to a patent when the invention has been developed by someone as employee of a company.
Does the invention / patent than belong to the employee or to the employer?
 If the invention has been developed by the employee during the term of his
employment contract and it is the outcome of research activities that are part of the
employee’s contract and job duties: the invention / patent will belong to the employer
(with no extra compensation for the employee).
 If the invention has been developed by the employee using knowledge and resources
provided by the company, the company / employer may claim the ownership of the
invention / patent or right to use it, but will have to pay an economic compensation to
the employee.
 If none of the circumstances described above are present, the ownership to the
invention will correspond to the employee.

F) Patent licenses
A patent may be the object of economic transactions. A patent owner may decide to license
the patent to a third party, that will be authorized to use it and exploit for certain purposes
and subject to certain time and geographic limitations.
Patent licenses may be:
 Contractual (voluntary) licenses, freely agreed between the paten owner and a third
party.
 Legal (mandatory) licenses, imposed by the law in certain circumstances, such as:
 Failure to use and exploit the patented invention or insufficient use / exploitation
 Export needs: the production of the patent owner is not meeting the customers’
demand for the particular product or service that is related to the patent
 Interdependence of two or more patents / inventions owned by different persons /
companies
 Public / general interest reasons

Section 17: Contracts

1. Obligations
General
Concept
Legal relationship or link between two parties whereby one of the parties (called debtor: the
party ‘obliged’ under the obligation) has to carry out certain conduct or behaviour in favour of
the other party (called creditor: the ‘beneficiary’ of the obligation).
An obligation entails:
 From the creditor’s perspective: right to demand performance of certain conduct or
behaviour.
 From the debtor’s perspective: need to carry out certain conduct or behaviour in favour of
the creditor.
Difference between obligation and liability: liability refers to the actual or potential legal
consequence of breaching (not fulfilling) a legal obligation.

Sources
Two main sources of obligations:
1. Law (legal provisions). Examples:
 Obligation to pay taxes
 Obligation not to commit crime
 Obligation of companies to compensate consumers for defective products
 Obligation to take insurance if you drive a car
2. Contracts/agreements: origin in the will of private parties.

Elements
a) Subjective elements: debtor (active party) / creditor (passive party)
Two parties may be reciprocally debtor and creditor at the same time. There might be several
debtors and / or several creditors. If so, it needs to be determined whether:
 The debtors are obliged (i) jointly and severally (individually), (ii) jointly
 The creditors are beneficiaries obligation (i) jointly and severally (individually), (ii) jointly
Legal rule: jointly, unless otherwise expressly agreed.
b) Objective element
The conduct or behaviour which is the object / subject of the obligation may consist in:
  The obligation to give or deliver something
 The obligation to do something
 The obligation not to do something
Legal requirements relating to the object of any obligation for this to be valid and enforceable:
1. It is or can be determined: the obligation may refer to fungible (interchangeable) things; the
obligation may refer to future things which do not exist at present.
2. The must have an economic value. To be able to assess the damage cause in chase of breach
by the debtor.
3. It must be tradable.
4. It must be possible. Legal to deliver, physically possible to exist.

Classes
Positive – to do something or to deliver something. Negative – not to do something.
Depending on whether it is qualified or not by a term or a condition:
 Simple obligations (not qualified)
 Qualified, subject to:
a) A specific term: obligation valid and effective for a certain period of time (until certain
date) or obligation will start being effective and enforceable on or after certain date.
b) A specific condition: condition precedent (must happen or be fulfilled for the obligation
to be effective and enforceable) or condition subsequent (the obligation ceases to be
effective and enforceable if fulfilled)
If several debtors or creditors: joint or joint and several (individual)
Depending on the area of law: tax / employment / commercial obligations.

2. Contracts (General and commercial contracts)

General considerations
Contract is any agreement between two or more parties intended to create obligations
between them. Main legal principle  freedom of contract:
 Freedom to contract
 Freedom to choose the type and form of contract
 Freedom to amend or modify contracts already signed, by mutual agreement

Main elements and requirements

Consent: clear will of both parties to enter into the contractual relationship.
This requires: each party having legal capacity. Important rules when one party is a consumer:
The supplier/vendor must provide complete and accurate information about the company or
product/service, price.
Object: subject matter of the contract, to which the main obligations of the parties refer.
Cause: purpose pursued by the parties when entering into contract. It must exist and be lawful.

Form of the contract

Form: means or way of externalizing and showing the agreement of both parties: (i) verbal
agreement, (ii) written agreement, (iii) deed (notary). General rule: freedom to choose the form
of the contract, especially in commercial contracts.
Exception: when the law expressly requires a particular form for specific types of contracts.
Examples: contracts relating to real estate, powers of attorney, agreement to set-up a
company, transportation contract, guarantees.

Termination
Main causes or events that lead to the termination of a contract:
 Mutual agreement
 Expiration of the term
 Unilateral(односторонний) termination by one party. This is possible if:
 Allowed and recognized by law. Ex: right to leave after x years/months in lease contracts.
 The contract was entered into for an indefinite term (but obligation to notify the decision
to terminate sufficiently in advance).
 The contract has been breached by the other party.
a) Type of breach: definitive breach, incomplete performance of the obligations, default
in the performance when this leaves the contract without a purpose or sense for the
other party.
b) One party may terminate the contract if the breach:
- Is attributable to the other party
- Refers to main obligations
- Is serious
c) Consequences of termination for breach:
- Return of the things already exchanged
- Compensation for damages suffered as a result of the breach
d) Alternative solutions in case of breach
- Right to demand performance of the obligation that have been breached
- Penalty clause: if agreed in the contract, right to receive a specific and fixed amount
in case of breach

Assignment of the contract

Substitution of one party (or both parties) by somebody else, who assumes and takes on its
contractual position.
General rule: none of the parties may assign the contract (transfer its rights and obligations
under the contract), except with the consent of the other party.
Exceptions:
1) when the contract expressly allows one parties to assign the contract without the other
party’s consent. Sometimes, the parties allow this if the original party remains obliged under
the contract.
2) when there is a legal rule providing for the automatic assignment / transfer of a contract in
certain circumstances. Main cases: mergers.

3. Sale and purchase contract

Concept
Contract between two parties (seller and purchaser) whereby one of them (seller) undertakes
to transfer something to the other party (purchaser), and this undertakes to pay a purchase
price in exchange to the seller.
Freedom of contract. Contents, rules and provisions will be those agree between the parties.
Option agreement:
 Put option – an option that is given to somebody to sell this asset at some point of time for
x price.
 Call option – an option that is given to somebody to buy this asset at some point of time
for x price
 Promise option

Elements
1. Parties: Seller, purchaser, guarantor.
2. Object of the S&P: tangible and intangible assets, future and not currently owned assets.
3. Purchase price

Obligation of the seller

1. Transfer and deliver the object of S&P – obligation to transfer the ownership and possession
of the object of S&P, through the means / form, at the time and place agreed.
 Time – when agreed and stipulated(conditioned) in the contract. If no specific time agreed:
must be made available to the purchaser within 24 hours. They will be considered
delivered only when the purchaser picks it up. If ASAP: determination according to the
customs and usages of the place. If there is a delay in the delivery  deemed(counts) as a
breach of contract (2 options: termination or demand of performance + compensation).
 Place – where agreed and stipulated(conditioned) in the contract. Transportation expenses
to the place of delivery: as agreed. If not agreed, then purchaser pays.
 Means of delivery:
 Physical delivery: tangible assets.
 Symbolic delivery: intangible assets (TM, shares)
2. Guarantee obligation
a) Guarantee of title / ownership
b) Guarantee of no hidden defects / faults

Obligations of the purchaser

Two main obligations by law:
1) To pay the purchase price
2) To receive the asset / product
Payment of purchase price
The price must be fixed at the time of the S&P contract or susceptible of being determined.
Time to make payment: as agreed between parties. Possibilities:
a) Before delivery of the asset
b) Simultaneously to delivery
c) After delivery / reception of the asset
Bank guarantee as a mechanism of protection for seller or buyer, depending on the agreed
payment scheme. Alternative to retention of all or part of the purchase price: payment into an
escrow account in a bank.

Transfer of the ownership / of the risks

When is the ownership considered transferred to the purchaser?
Two requirements:
a) Execution (выполнение) of the S&P contract
b) Delivery of the object of the S&P
Risk of loss or damages of the object due to force majeure events or other causes not
attributable to the seller. When is such risk transferred to the purchaser?
a) At the time the object of the S&P is made available to the purchaser
b) If the purchaser is given a right to inspect the product before considering it received, at the
time of completing such inspection.

Breach
General rule: right to demand performance or to terminate the contract, plus right to
compensation for damages in both cases, provided that the breach is serious and relates to the
main obligations of the contract
1) Breach by seller of obligation to deliver the object of the S&P
2) Breach of the purchaser of obligation to pay the purchase price

4. Agency contract
Concept and main aspects
Contract between two parties whereby one of them, the agent undertakes to promote sales for
another party, the principal, on a regular / stable basis in exchange for a remuneration (fees).
It is a stable / lasting relationship. The agent typically does not assume the risk of the promoted
sale or transaction. The agent has independence and its own organization. Common examples
of agency relationships: real estate agent, insurance agent, bank agent. The terms and
conditions of the agency contract:
 Are those agreed by the parties
 However, there are certain rules set out by the Agency Act applicable in each country
 In the EU, there is a European Directive on Agency Contracts that tries to harmonize the
regulation in the different EU countries.
Parties
Principal, agent and subagent (only with the express prior consent of the principal and if it is
chosen exclusively by the agent, the agent is fully responsible for the subagent’s actions).

Object of the contract: agent activity

The object and purpose of the agency contract is the agent activities aimed at winning clients
and generating business for the principal.
Two main alternatives:
a) Object is only to promote sales
b) Object is to promote sales and execute the sale transaction on behalf of the principal

Obligations of the agent

General duty: to carry out its professional activities with good faith and loyalty, looking for the
best interest of the principal.
Specific obligations:
a) Follow the principal’s instructions.
b) Being diligent and careful in the performance of the agency activities.
c) Provide the principal all relevant information obtained in relation to the promoted
transactions.
d) Receive claims from customers on products

Rights of the agents

Receive a list / summary of all fees accrued for the sales promoted during the previous quarter.
Information (breakdown) explaining how the fees have been calculated.
Review the principal’s account to double-check the sales and the calculation of the fees.

Obligations of the principal

General duty: to act in good faith and with loyalty in its relationship with the agent.
Specific obligations:
a) Pay the agreed remuneration:
 Fixed fee
  Variable fee
 Combination of fixed and variable
b) provide the agent with all relevant marketing materials, price lists, product samples and
other important information necessary or convenient for the agent to promote the principal’s
products or services.
c) Confirm to the agent whether it accepts or rejects a particular transaction within X days.
d)After accepting a transaction, informing the agent as soon as possible about the full
execution.

Variable fees
Variable amount that depends on the number or the value of sales promoted by the agent: 1%
of the sale or variable amount per tranches.
On which sales does the agent earn the fee?
 Sales made pursuant to the intervention of the agent
 Sales made to customers to whom a previous sale was made thanks to the agent
 Sale made after termination of the agency contract if:
 The principal receives a purchase order thanks to the agent’s activity before
termination
 The sale is made mainly because of that agent activity prior to termination, provided
that the sale is made within 3 months after termination
When is the fee earned and accrued?
 On the date when the sale is actually made or should have been made
 If sale is finally not completed for reasons not attributable to the principal, the agent
may be requested to return the fee
When does the principal have to pay the fee?
Last day of the month following the quarter when the sales are made, unless a shorter term is
agreed in the contract.
Expenses
Agent has no right to get reimbursement for the expenses, unless the parties agree otherwise
in the contract.

Termination
When / how the contract be terminated?
At any time by mutual agreement. Also in the following situations:
a) Contracts for a fixed term
b) Contracts for an indefinite term  unilateral termination by any party with prior notice of:
 One month for every year of duration of the contract
 One month if the contract has been in force for ≤ 1 year
c) Both fixed and indefinite term contracts can be early terminated without prior notice in case
of:
 Total or partial breach of the obligation of the other party
 Bankruptcy of the other party
 Death of the agent

Agent’s right to compensation

At termination of the agency relationship, the agent may be entitled to certain compensation /
indemnification, subject to some conditions:
Clientele compensation:
 Conditions:
  The agent has won / brought clients to the principal
 The agent has contributed to the increase of the sale / business
 Also right to clientele compensation in case of death of the agent
 Amount
 Average annual amount of fees received by the agent during the last 5 years of the
contract
 If contract was in force for less than 5 years: average annual amount of fees received
during all years of the contract
Compensation for damages
 Conditions:
 Unilateral termination by the principal
 Insufficient prior notice, the prior notice given to the agent is not enough for the
agent to recover the costs and investments made for the performance of its agency
activities under the contract
 Amounts: damage suffered for the early termination = costs and investments not
recovered
 The parties cannot limit or fix the amount of the indemnification beforehand in the
contract
 However, the can fix it and agree on the amount upon termination
 No right to compensation for damages if:
 The principal is terminating the contract based on the agent’s breach of its
obligations
 It is the agent the party termination the contract
 The agent has assign the contract to another agent

5. Distribution contract
Concept
Parties: the distributor and the principal (the company / supplier)
Object / purpose: distributor undertakes to purchase and resell brand products from the
principal and provide after-sale service to the final customers.
Territory: normally, the distribution is limited to a specific territory.
The term may be fixed or indefinite.
Freedom of contract: the terms and conditions of the distribution contract are those agreed by
the parties.
 In most countries there is no specific Act / law on distribution contracts
 However, competition laws set out certain limitation on what can be or cannot be
agreed in a distribution contract
Differences with similar contracts
The distribution involves purchase and resale of the products. The distributor makes a profit on
the resale, by the difference between the purchase / supply price and the resale to the final
customers. The distributor has its own customer base. Resale means selling the product or
goods in the same condition as they were acquired.

Exclusivity
An exclusivity clause in distribution contracts is standard practice (limited to the agreed
territory):
 By the distributor in favour of the principal
 By the principal in favour of the distributor
  Reciprocal
Exclusive distributors get typically a commission for sales that are made by the principal in the
assigned territory.

Territory
Active sales out of the territory assigned to the distributor may be prohibited by the principal if:
 The distributor has been granted the exclusivity in such territory
 The other countries or territories have been assigned to other distributors also on a
exclusivity basis

Typical obligations of distributor

Main obligation: purchase products for their resale in the agreed territory. Meet certain
purchase targets per year. Offer after-sale service to final customers: repair works / sale of
spare parts.
Other usual obligations of the distributor included in the contract:
 Use of duly qualified and skilled employees
 Suitable premises / offices for storing products and developing the business
 Promoting the sale of the principal products
 Assisting the financing entity associated with the principal
Very important: the resale price is set by the distributor. Principals may recommend resale
prices, but cannot impose them on the distributor. This would be against competition law.

Typical obligation of principal

Main obligation: selling the agreed products to the distributor. Maintaining certain minimum
stock volumes at all times. Exclusivity in favour of the distributor in the agreed territory.
However, it may sell directly to customers if it pays a commission to the distributor.

Termination of the contract

If the distribution contract has been agreed for a fixed term, the contract will expire when the
agreed term has elapsed. If the distribution contract has been agreed for an indefinite term, it
may be terminated by unilateral decision of any party, by giving a prior notice sufficiently in
advance. If no specific prior notice was included in the contract, it will be considered sufficient
or not on a case by case basis depending on the circumstances.
If no sufficient notice is given, the contract may still be terminated, but the terminating party
has to pay a compensation to the other party for the damages suffered as a result of the early
termination. Many times in cases of indefinite contract the parties agree that the distributor
will have no right to claim damages in case of unilateral termination by the principal, but the
principal will have an obligation to repurchase the products unsold at a certain discount.
There is normally no legal right to compensation for clientele. However, there have been many
lawsuits where distributors have demanded a fair compensation for business / customers that
have been brought to the principal by the distributor. Many courts have accepted this demand,
when the distributor has proved that: (i) the customers / business were directly gained by the
distributor, (ii) the principal will benefit from such customers / business after termination.

6. Franchise agreement
Concept and main aspects
Agreement between two companies whereby on the them (Franchisor), owner of certain
trademark, know-how and business activity with a reputation already gained in the market,
grant the other party (Franchisee) the right to exploit them for a specific term and within a
specific territory, in exchange for payment of certain fees.
The franchisor and the franchisee are two parties legally and economically independent,
although presented to the public as a single integrated business.
Many time, the franchisor creates a master franchise structure, for example in a particular
country, where a franchisor grants a ‘master franchise to a company (master franchisee) which,
in turn, grants sub franchises to many other companies or individuals through the territory of
that country. Freedom of contract: there are generally no specific laws, acts or rules governing
the franchise agreements and relationship.
The main practical advantages of franchises are:
 For franchisors: the possibility to expand and enter new markets through a mechanism
that is normally more simple and less expensive that setting up your own branch or
subsidiary.
 For franchisee: the ability to open up a business faster and with higher chances of
success and less risk.
 For consumers: more competition.

Types
1. Distribution franchise: the franchisee distributes the products manufactured and / or
supplied by the franchisor, under franchisor’s brand.
2. Service franchise: the franchisee offers its services using the franchisor’s brand and following
the franchisor’s instructions.
3. Production franchise: the franchisee manufactures the products following the instruction of
the franchisor and sells the products under the franchisor’s brand.

Preliminary important matters for franchisees

The franchisee can and should request the franchisor to provide complete and accurate
information about the company, the business and the proposed contract terms, certain time in
advance to signing the contract.
The main information to be requested before joining a franchise network is:
 Full information on the franchisor: complete name, address, registration details, share
capital
 Title of ownership or license to the brand, trademark, know-how, the commercial and
technical assistance to be provided to the franchisee
 General description of the industry or market
 Experience in the industry or market
 General explanation of business, the know-how, the commercial and technical
assistance to be provided to the franchisee
 Structure and extent of the franchisor’s network, number of franchises, which are
operated by the franchisor and which by other franchisees
 Main terms and condition of the proposed franchise agreement
The franchisee is under an obligation to keep the information provided under strict
confidentiality.

Main elements of the franchise contract: know-how and fees

Franchisor's know-how
Know-how is a set or body of practical skills, information and knowledge that are not patented
and result from the franchisor’s experience in its business activity and which is:
 Practical
  Secret and original
 Relevant for the business
 Dynamic
 Identifiable
The know-how is normally explained and documented in the Operations / operating manual
(OM) of the franchisor:
 The OM is a document explaining the general principles, values, mission and business
philosophy of the franchisor, which are necessary to run the business successfully and
the ways, tools, methods to be used and follow for the operation of the business by the
franchisee
 The OM will be provided to the franchisee and usually attached as Annex to the
franchise agreement
 The content of the OM is normally very technical and depend on the type of franchise
and the type of business
Franchise fees
The franchisee must normally pay two types of the fees to the franchisor.
Initial fee: it is a lump sum payment, it is payable only once, at signing of the franchise
agreement as a price for joining the franchisor franchise network.
Ongoing fee: fixed or variable amounts. Payables in the amounts, on the regularity and
pursuant to the criteria agreed by the parties in the contract.
Most usual ongoing fees:
1) Royalties: % of the sales, variable amount depending on the production
2) Other: advertising, insurance, lease, rent, audit fees

Franchisor’s obligations
1. Deliver or make available the elements that are necessary for the Franchisee to start and
operate the business: IP rights (license or authorization of use), Know-how: Operating manuals
and additional explanations or information provided.
2. Provide technical and commercial assistance and advice: at the beginning and throughout
the term of the contract, dynamic and continued advice.

Franchisee’s obligations
To run and operate the franchised business:
 Distributions franchise
 Service franchise
 Production franchise
Payment of the fees: initial and ongoing

Other possible obligations

Exclusivity in favour of the franchisee in agreed territory  intended to protect the interest of
the franchisee, allowing it to recover the investments and make them profitable. Otherwise,
the franchisee might decide not to take the risk. Implications:
 For the franchisee: operation of the franchised business only within the agreed
territory.
 For the franchisor: undertaking not to carry out activities competing with the franchisee
with the agreed territory.
Purchase of supplies: franchisee’s obligation to purchase supplies exclusively from the
franchisor. Sometimes, a minimum annual purchase obligation is included in the contract.
Termination
Term: may be fixed (normally 5 or 10 years) or indefinite.
Grounds for termination:
 Breach of contract
 Death or liquidation
 End of the agree term
 Unilateral termination: requires prior notice

Consequences of termination
1. Cessation of the activities and return by the franchisee of all business elements received.
2. Settlement of any outstanding operations
3. Non-compete obligation
4. Compensation for damages or clientele

7. Banking / financing contracts

General
Banking transactions are those operations carried out by banks and financial entities as part of
their business activities.
The common aspects of virtually all transactions are:
 A subjective element: one of the parties is necessarily a bank
 An objective element: banking operation relating to money or securities
Concept of bank or financial entity: a company which regular and usual activity is to raise funds
from the public and such fund to make loans, grant credit facilities or carry out other active
transactions.
Two main elements of any banking transactions or contract are:
 Money: received by the bank from the client or lent by the bank to the client.
 Price (interest): paid by the bank to the client (passive transaction) or paid by the client
to the bank (active transaction). Typically it is not a fixed predetermined amount, but
variable depending on 3 factors:
a) Amount (deposited / borrowed)
b) Interest rate
c) Time between receiving and reimbursing the money
There are three main types of banking transactions:
1) Passive transactions: the bank raises / receives funds from clients, that they may use them
for different purposes within its business activity. The client delivers money to the bank and
gets credit right against the bank for the same amount, plus the right to be paid an interest on
such amount. Main passive banking transaction: bank deposits.
2) Active transactions: the bank lend money or makes fund available to clients, who borrow or
may borrow it and become and obliged to reimburse it along with the agreed interest. Most
common active banking transactions: loan, credit facilities, discount, leasing, renting, factoring.
3) Neutral transactions: services provided by banks in favour of clients, in exchange for a fee or
commissions. Examples: bank transfer, opening and maintaining a bank account, rent of a safe
deposit.

Bank deposits
The bank receives money from clients, which they have to keep, guard and reimburse to the
clients within the term and with the interest agreed. It is the main type of passive transaction
for banks and the main source of funds that enables them to carry out active transactions. In a
bank deposit, money becomes owned by the bank.
There are two main types of bank deposits:
a) At sight / on demand deposit: client is entitled to request reimbursement of the deposited
amounts at any time, in whole or in part. The remuneration is lower.
b) Term / time deposit: client is entitled to request reimbursement of the deposited amounts
only after certain date. The remuneration will be higher or lower depending on the length of
such term.
Deposits Guarantee Fund: public institution funded by all banks and financial entities in a
particular country, along with the Central Bank, which purpose is to guarantee the
reimbursement of a minimum amount of all deposits to banking clients.

Bank loans
A bank loan is an active banking transaction whereby the bank agrees to lend and deliver
money to the client in a specific amount and on a specific date and the client remains obliged
to pay interest on the lent amount and to reimburse it on the agreed term, in one payment or
different instalments.
Difference with credit facilities / lines of credit: making a loan involves an effective lending /
borrowing of a specific amount from the beginning, whereas opening a credit facility involves
making certain maximum amount of money available to the borrower (i.e. not necessarily an
effective borrowing from day one). 

Price of the loan. What does the client pay?
 Interest
 Fixed (e.g. 8%) or floating / variable
 Calculation formula: fraction where Numerator: loan amount, Denominator: # of
days as per the year chosen (360 or 365 days) Times # of days effectively elapsed
 Default interest (much higher than regular interest) in case of payment default,
until outstanding amount is paid.
 Regular fees and costs: application fees, appraisal fees (if assets are collateralized),
prepayment fees (if prepaid), cancellation fees
The loan may be secured/guaranteed or unsecured. In the first case:
• The banks will typically ask for (i) personal guarantees (from individuals or entities), e.g.
a guarantee from the parent company or main shareholder of the borrowing entity;
and/or (ii) security / collateral, e.g. a real property mortgage, a pledge of shares, a
pledge of any balance at bank accounts, other. 

• The guarantee or security / collateral may be enforced by the bank in case of insolvency
and payment default by the client. 

Termination 

 Ordinary repayment:
(i) ‘Bullet loan’ – repaid in full through one single payment at maturity (may include
principal plus interest); 

(ii) Amortizing loan – repaid several payments (yearly, quarter- 
 ly...), often with one
‘balloon payment’ at the end. 

Voluntary early repayment (prepayment). Often subject to payment of a fee (e.g.: 0.5% of the
repaid amount – why?)
Mandatory early repayment in certain circumstances
In whole: when borrower breaches the obligations under the loan agreement, becomes
insolvent, uses the borrowed amounts for purposes different than those for which the loan was
requested, etc.
Comfort letters by banks in favour of clients / comfort letters to banks: may be ‘soft’ (not a
guarantee) or ‘strong’ (very close to a guarantee).

Credit facilities
The bank undertakes to grant credit to the client, ie to make money available to the client up to
a certain maximum amount and during a certain period of time. The client may use the facility
and make borrowings up to the agreed maximum amount. Difference with a regular loan:
object is to ensure availability of fund to meet the client’s need. Client will use it, if needed, in
accordance with its financial needs.
Price of the credit facility. What does the client pays?
 Interest on the amounts effectively borrowed
 Availability fee
 Regular fees and costs

Syndicated loans or credit facilities

One client / borrower but several banks. It is a mechanism used when loan or credit amounts
are particularly high, with two goals: (i) being able to gather all funds / moneys needed by the
client, and (ii) diversify and share potential default or risk of insolvency of the client among
different banks. It may be used either for loans or credit facilities. One of the banks acts as
‘agent bank’ – tasks of coordination, searching other banks interested in joining the syndicate,
communications with the borrower. The agent charges a fee to the other banks. The right and
obligation of each of the banks in a syndicate are limited to a specific %.

Discounting and factoring

The bank accepts to advance and anticipate to the client the amount of bills of exchange,
checks, promissory notes, invoices, etc. held by the client against third parties and which are
not due and payable yet. Discounting and factoring are the same type of transaction but:
factoring refers to invoices, while discounting refers to ‘commercial paper’ (bills of exchange,
notes). Exchanging a credit against a third party, normally a customer for actual cash today.
In exchange for anticipating the invoice amount:
 The bank charges an interest; the interest is paid once at the time of the discounting.
The interest / discount charged by the bank will depend on the client and the third party
solvency
 Also, the client assigns to the bank its credit right against the third party. If the third
party fails to pay, the bank may claim reimbursement from the client, plus a fee /
commission for the third party default.
A bank may in turn choose to rediscount the note, invoice, bill through another bank.
Rediscounting is a transaction between two banks.
The bank assumes a duty of diligence: when the note, bill matures and becomes due and
payable, it will have to exercise any rights and follow any formalities necessary to collect from
the third party.

Bank guarantees
In many business transactions one party assumes relevant payment obligations towards the
other party, which in turn assumes a risk of insolvency or default of the former. In such cases it
may be standard for the second party to ask for a bank guarantee. Three parties: guarantor
(bank), guaranteed party (company with payment obligations), and beneficiary of the
guarantee (counterparty in the business contract or relationship). The payment obligations
guaranteed may be actual or potential. Price of the guarantee: fee or commission on the
maximum guaranteed amount, charged by the bank to the guaranteed party on a regular basis
(e.g. yearly or quarterly).
In regular guarantees, enforcement of the guarantee by the beneficiary and payment by the
bank is subject to the condition that the beneficiary has first demanded payment from the
debtor and this has not paid. However, the guarantee can be an “on demand” or “first
demand” guarantee. Here, the bank assumes a joint and several obligations, abstract or non-
related or conditioned to the default (non-payment) of the debtor (guaranteed party). I.e. the
beneficiary may theoretically claim and demand payment directly from the bank.
The bank will often request a counter guarantee, depending on the financial condition and risk
of insolvency of the client (guaranteed party). Example: same amount of money deposited and
‘frozen’ in an escrow account opened at the same bank.