The contentious clause read as follows:
“Termination of this contract due to unilateral withdrawal or termination by the distributor shall give rise to the payment of a compensation […] equivalent to the ‘Net Turnover’ generated between the parties in the two immediately preceding years.”
The distributor, who, in the first and second stages of the judicial proceedings, was ordered to pay the contentious compensation due to the contract termination, essentially made the following arguments before the Supreme Court: 1) Such compensation clauses are invalid because they do not penalise a breach of contract but rather the exercise of a fundamental contractual right such as the right of termination. 2) If the court had awarded this compensation, it should have lessened it in accordance with article 1154 of the Spanish Civil Code (Código Civil, CC). 3) This clause is also invalid under article 25 of the Spanish Law on Agency Contracts (Ley sobre el Contrato de Agencia, LCA) and existing case law, as it would effectively bind the parties for life.
However, these arguments were rejected by the Supreme Court who first distinguished between compensation clauses and penalty clauses. The main difference is that compensation clauses provided for in the case of unilateral termination of the contract foresee specific economic consequences of the said termination, while there is no question of fulfilment or breach of the contract here. For this reason, the contentious clause may not be considered a penalty clause as defined in article 1152 CC.
This differentiation is significant. As it may not be considered a penalty clause, the compensation cannot be lessened, neither by virtue of the court’s discretion pursuant to article 1154 CC nor taking into account the degree of fault pursuant to article 1103 CC.
The court also rejected an analogous application of article 25 LCA, since the contentious clause did not provide for compensation for lost clients or investments made, as is the case with the LCA. Furthermore, the court does not find the clause to impose such grave and disproportionate conditions of termination to force a lifelong commitment to the contract and thus preventing withdrawal or termination. On the contrary, according to the court, the clause itself provides for the possibility of termination. Furthermore, it believes there to be no necessity to examine whether the agreed compensation is disproportionate or unbalanced, as this is a contract between entrepreneurs and not with a consumer.
For these reasons, the Supreme Court confirms the validity of the compensation provided for in the clause and rejects its reduction.