Belgian High Court puts an end to the ‘Belgian Torpedo’. End of an era?

On 7 April 2023 the Belgian High Court finally dropped the long expected atomic bomb on the international application of the Belgian protective status for distributors upon termination of ‘exclusive’ distributorships on the Belgian territory.

Belgium’s protective status for distributors

Belgian Distribution law has two somewhat peculiar protection mechanisms for distributors,:

• Book X, chapter 3 of the Belgian Code of Economic Law (hereafter ‘CEL’) on termination of exclusive distribution agreements, providing a rather long notice period and a possibly very high termination compensation for (i) exclusive distributors, (ii) quasi exclusive distributors  or (iii) distributor with ‘important additional obligations’ (such as the obligation to have brick and mortar shop, showroom, marketing obligations….) under a contract of indefinite duration, or under a contract of definite duration as of its third renewal.
• Book X chapter 2 CEL on precontractual disclosure, granting any entity obtaining the right to use a ‘commercial formula’ (being (i) a  tradename, (ii) a billboard, (iii) knowhow or (iv) commercial or technical assistance; the right to receive, on month in advance a precontractual disclosure document on penalty of annulment of the agreement within a two year term as of conclusion of the agreement.

Both of these laws are mandatory and can be invoked by any distributor ‘mainly active on the Belgian territory’ (art. X.33 CEL and X.39 CEL) often to the great surprise of unknowing foreign franchisors operating in Belgium (the ‘Belgian Torpedo’. Parties can thus not exclude the long notice periods (case law goes up to 42 months) or goodwill or termination indemnities (case law goes up tot 2 years gross margin) in their contract. By giving Belgian courts exclusive jurisdiction to govern disputes regarding termination of these contracts, Belgian law aimed at guaranteeing Belgian distributors this protection and avoiding that foreign courts would set aside the Belgian protective mechanism.

Application to franchising

Whilst there is no discussion that the disclosure obligations apply to franchising (the law was made with franchising in mind), there is more discussion on whether Book X Chapter 3 applies to franchising. Three tendencies can be seen in case law (and doctrine). The ‘exclusion’ theory highlights the differences between franchising and exclusive distribution as per Book X chapter 3 and states that franchising is thus not subject to this mechanism. The ‘absorption’ theory states that a franchising agreement contains an element of an exclusive distribution as per Book X chapter 3 and thus that the mechanism always applies. A third tendency offers a compromise in the sense that a franchise agreement could fall within the scope of Book X chapter 3 if the franchisee is designated by the Franchisor as the sole (or one of the only) franchisees in a territory, or takes on ‘important additional obligations’ regarding the distribution of the franchisors’ products.

In an important decisions of 30 April 2010 the Belgian High Court implicitly recognized that Book X. chapter 3 has a broad scope and could thus apply to franchise agreements.

How does this work in an international context?

Belgian law is off course subordinate to European Regulations. The Rome I and Rome II regulations provide for a free choice of law in international distributions agreements (thus for distribution agreements with an international element, thus not purely ‘Belgian’).

This choice can only be set aside by a court to give way to ‘Overriding Mandatory Provisions’ under national law. Overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization.

The Brussels Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (EEX Regulation) furthermore allows parties in an international context  to freely choose the courts of any EU member state.

National courts versus arbitration

Based on the above, the two protection mechanisms under Belgian law could be set aside in ‘international distribution agreements’ even with the distributor mainly active in Belgium by choosing another national law than Belgian law and granting exclusive jurisdiction to non-Belgian courts. In theory foreign courts could then decide to apply the protection mechanisms as Overriding Mandatory Provisions.

Belgian courts could not refuse to send disputes regarding both protection mechanisms to foreign EU jurisdictions.

The same was not the case for ‘foreign arbitration’ where Belgian courts could, based on the provisions X.33 CEL and X.39 CEL refuse to send the disputes to arbitration and thus refuse to apply a valid arbitration clause in distribution agreements, since the EEX Regulation only applies to national courts and not to arbitration.

Conclusion: there was thus a lot of uncertainty whether the two protection mechanisms were ‘Overriding Mandatory Provisions’. It was unclear whether an arbitration clause in an agreement with a Belgian distributor or franchisee would stand in light of the Belgian Book X CEL.

The writing on the wall with the Unamar decision regarding the Belgian Agency Law

In the Unamar case law regarding the Agency directive (transposed in the Belgian Book X Chapter 1 CEL), the European Court already give some guidance on how to interpret Overriding Mandatory Provisions. It is up for the national court to decide whether a national law is that crucial that it should override a choice of law clause. Based on this guidance, Belgian courts already decided that the Belgian Agency Law is not ‘crucial’ and thus not an ‘Overriding Mandatory Provision’.

High Court decision 7 April 2023 ‘atomic bomb’ for ‘The Belgian Torpedo’

The dispute concerned the exclusive distributor of an Austrian supplier. The distribution agreement provided for an arbitration in Vienna under Austrian law. The Belgian distributor however launched proceedings in Belgium, arguing that the case could not be referred to Austrian arbitration because there was no guarantee that the arbitrators would apply Book X chapter 3 and thus grant the distributor a long notice and termination indemnity.

The court in first instance followed this reasoning, but the decision was reformed by the Court of Appeal. The unhappy distributor appealed to the High Court, claiming that the Court of Appeal incorrectly labelled the protection mechanism of Book X chapter 3 as ‘not crucial’.

The High Court rightfully ruled that ‘all purely proprietary claims’ can be subject to arbitration. The court assessed Book X chapter 3 and comes to the conclusion that this law only protects ‘private’ interests and is thus not an ‘Overriding Mandatory Provision’ as per the Rome I Regulation.

This has three important consequences;

• All disputes regarding exclusive distribution agreements falling within the scope of Book X Chapter 3 can be subject to arbitration.
• Belgian courts cannot refuse to apply a choice of law clause because it offers no guarantees that Book X chapter 3 would be applied.
• Foreign courts do not have to consider Book X Chapter 3 as Overriding Mandatory Provisions and must only apply the chosen law.

It is expected that the same reasoning applies to the Law on Precontractual Information (Book X.2 CEL).

Conclusion

While the two protective mechanisms remain relevant for purely Belgian distribution relations, they must no longer be considered an impediment in international distribution contracts operating on the Belgian territory. International franchisors can now be assured that no peculiar Belgian laws will interfere with their template franchise agreement.

While in theory this seems revolutionary, it will in practice only take away an uncomfortable uncertainty regarding the validity of arbitration and choice of law clauses that in the end were always never actually invalidated.

Franchisors must however carefully assess whether the cooperation is not ‘purely Belgian’ and the contractual choice of law is not a mere evasion of mandatory law.