The Status of the Agent's Goodwill Compensation in Portugal

I. One of the most debated issues in distribution law is the nature of the right to a "goodwill compensation" to be awarded to the agent / distributor / franchisor in case of termination of the agency / distribution / franchise agreement. In the context of this right, it has been discussed whether this right amounts to a principle of the Portuguese Public Policy (either "national" or "international" principles of public policy). This discussion has been the subject of two decisions of the Portuguese Courts, namely the Lisbon Court of Appeals and the Supreme Court of Justice.

Indeed, the Lisbon Court of Appeals granted recognition to an arbitral award made in Paris, under the Rules of Arbitration of the ICC, holding that the Portuguese law applicable to the Agency Agreement, in spite of being of mandatory nature, does not constitute part of the international public policy of Portugal and, therefore, does not constitute grounds to refuse the recognition of a foreign arbitral award.

This decision, made on 16 January 2014, is available online and full translation is published in the 2014 Yearbook Commercial Arbitration. Later that year, the Supreme Court of Justice confirmed the decision of the lower court (available online here).

It is interesting to read the particulars of the case and discuss the decision.

The Particulars of the Case

II. Company S sought the recognition and enforcement in Portugal of an arbitral award made in Paris, under the auspices of the ICC. The underlying legal relationship related to a series of distribution agreements ("Importer Agreements") entered into between Company S (agent) and Company SE (principal) for the distribution in Portugal of "SEAT" vehicles, manufactured in Spain. This commercial distribution relationship lasted for nearly 20 years and was covered by several written agreements, the last of which was entered into between the parties on 1 October 1996. This "Importer Agreement" was subject to the Spanish Law and contained an arbitration clause providing for the resolution of the disputes under the Rules of the ICC, having Spanish as the language of the procedure.

On 27 September 2002, under the grounds of the EU Regulation no. 1400/2002 of 31 July 2002, Company SE declared to Company S that the "Importer Agreement" would not be renewed as of the date of the agreed term. On 14 March 2003, Company S started arbitration in Paris against Company SE, under the ICC rules, making several claims, including for goodwill compensation.

The arbitral tribunal awarded Company S a substantial portion of its claims, in particular a compensation for loss of future revenue, but denied Company S the requested relief for goodwill compensation.

In 2005, Company S and Company SE entered into a "Mutual Acquittance Agreement". According to such agreement, each of the parties declared that it had received all that it was entitled to receive pursuant to the arbitral award. Each of the parties declared that it had nothing to claim from the other, thus acquitting the other.

Notwithstanding the "Mutual Acquittance Agreement", Company S and one of its subsidiaries filed with the Lisbon Court of First Instance a lawsuit against Company SE and its Portuguese subsidiary, claiming goodwill compensation (that had been denied in the arbitral proceedings).

Among other pleas, Company SE contested the lawsuit invoking the effect of res judicata of the arbitral award. Company S objected to that contention, arguing that the arbitral award could not have the effect of res judicata within the Portuguese jurisdiction and that the award could not be recognized or enforced in Portugal simply because the denial of goodwill compensation would be in breach of the public policy of the Portuguese Republic.

Following an appeal that reached the Supreme Court of Justice, the Lisbon Court of First Instance decided that the recognition and enforcement of the arbitral award was a preliminary issue and, therefore, decided to suspend the lawsuit until the award was recognized and enforced. Company SE then brought the recognition procedure of the ICC arbitral award before the Lisbon Court of Appeal. Company S contested these proceedings, alleging inter alia that the ICC award could not be recognized, as the recognition and enforcement of that award would be in breach of the public policy of the Portuguese Republic.

III. The Court of Appeal of Lisbon considered the contention raised by Company S, according to which the arbitral award could not be recognized because it had denied goodwill compensation, which was contrary to the public policy of the Portuguese Republic. Indeed, Company S pleaded that Art. 33(1) of Decree Law no. 178/86 of 3 July 1986 (Commercial Agency Contract Act), under its mandatory provisions, grants the agent goodwill compensation in the case of termination of the agency contract. It further provides that the contractual relationships that have been "exclusively or predominantly" performed within the Portuguese territory shall only be subject to a law different to the Portuguese if it is more advantageous to the agent. This legal framework, Company S contended, is applicable by analogy to all commercial distribution contracts, and such was the case of the "Importer Agreements". Thus, an arbitral award that has applied a foreign law that does not provide for goodwill compensation payable to the agent may not be recognized in Portugal for being intolerably contrary to the public policy of Portugal.

The Decisions of the Portuguese Courts

IV. Addressing this issue, the Court of Appeal of Lisbon considered that the grounds to refuse the recognition of a foreign arbitral award are listed in Art. 56 of the new Portuguese Arbitration Act (Law No. 63/2011, of December 14, 2011) and are in line with the New York Convention of 1958. According to this legal provision, the recognition of an arbitral award may only be refused if the recognition or enforcement of the award would lead to a result blatantly incompatible with the international public policy of the Portuguese State – Art. 56(1)(b)(ii) of the Portuguese Arbitration Act.

The Court of Appeal of Lisbon considered that defining "public policy" is a hard and complicated task. It also considered that the "public policy" that may bar the application of a foreign law shall be understood as the "international public policy" and that no one, until now, has been able to suggest a definition of "international public policy" that could enable a judge to solve any given dispute without hesitation. The status of the legal science, the Court of Appeal cited, allows us only to establish "general guidance principles serving as a criterion and a compass in the floating and uncertain sea of the realities of legal life."

It also considered that the recognition of the arbitral award would not amount to a blatant breach of fundamental principles and rules of the domestic legal system, notwithstanding the fact that the foreign law did not grant a claim (goodwill compensation) that is accorded under the national law. The recognition of the arbitral award would not amount to a severe and essential contradiction to the principles of the international public policy of Portugal.

The Court of Appeal did not reject the conclusion that the goodwill compensation is grounded in a national mandatory legal provision that aims to protect the agent. However, the Court reasoned, the mandatory nature of the rule is not decisive to ascertain that such rule is part of the international public policy of the Portuguese State. The rules of Articles 33 and 38 of the Commercial Agency Contract Act have the characteristics of the domestic public policy but not of the international public policy, the latter being more restrictive than the former.

The Court of Appeal of Lisbon, therefore, recognized and ordered the enforcement of the ICC arbitral award.

V. The Supreme Court of Justice, in its decision of October 23, 2014 affirmed the decision of the Lisbon Court of Appeals, holding that "notwithstanding the fact that Art. 33 of Law Decree No. 178/86 of 3 July 1986 has a mandatory nature and, as such, is part of the national public policy, that finding does not imply that the disregard of such right by the arbitral award, on account of the application of a different law, will entail a violation of the international public order of the Portuguese State."

Final considerations

VI. As seen earlier, the Portuguese superior courts did not consider an arbitral award, that did not apply a national mandatory rule (goodwill compensation right under the Portuguese Commercial Agency Contract Act), to be in violation of the international public policy of Portugal.

The approach taken by the Portuguese courts, in this particular case, is right. However, it is not a pacific understanding in the context of international commercial arbitration. Some have already concluded in quite the opposite direction.

Indeed, we should note the "fluid nature" of the principles of public policy, and that the circumstances of each case may call for a different analysis and conclusion. As the Lisbon Court of Appeals noted, in the application of the public order principles, it is necessary to weigh in the "floating and uncertain sea of the realities of legal life."

Just for illustration purposes, in cases dealing with the issue of penalty clauses and liquidated damages clauses, the Portuguese superior courts have found that "liquidated damages clauses are not contrary to the international public policy of Portugal". And they have also decided that "a foreign award enforcing a liquidated damages clause of such high magnitude that it impairs the personal and economic freedoms of a party is incompatible with the international public order of Portugal and is therefore unenforceable."

In sum, the principles of the international public policy of Portugal are not a "black and white" matter, and require careful consideration of every particular aspect of the case and the appropriate balance of the interests at stake.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.