Turkey: A Litigation Overview

Portfolio Compensation Arising from the Termination of Distribution Agreements

The supply and distribution networks that form the capillaries of modern commerce are protected through a complex legal framework that extends from producer to consumer. In particular, the market penetration strategies of national and international brands are often structured through arrangements commonly referred to as “distribution agreements”. This “win-win” model, in which the producer minimises financial and operational risks while the distributor generates commercial volume based on an established brand value, does not always proceed amicably as initially intended.

In practice, long-standing, trust-based relationships frequently evolve into compensation disputes due to weak contractual mechanisms, informal agreements not documented in writing, ambiguous single-page authorisation documents, or poorly managed post-termination processes, particularly in the form of so-called portfolio compensation claims. It should be emphasised that even in the absence of a written agreement, the de facto and continuous commercial relationship between the parties is recognised as contractual in nature, and its termination may give rise to contractual claims for compensation.

Recently, especially in relation to national and international brands operating in Turkey, the termination of distribution relationships and the resulting compensation claims, particularly portfolio compensation claims, have increasingly arisen in both judicial decisions and practical disputes. In this article, we summarise key considerations regarding disputes over portfolio compensation arising from distribution agreements under Turkish law and in light of the prevailing case law of the Turkish Court of Cassation (Yargıtay).

Distribution agreements under Turkish law

In practice, distributors may operate either as exclusive sellers or as non-exclusive ordinary dealers. Under Turkish law, to claim portfolio compensation in distribution relationships, it is important to assess whether the distributor actually operated exclusively, regardless of whether this exclusivity is explicitly stated in the agreement (if any).

Distribution agreements granting exclusivity, legally referred to as “exclusive distribution agreements (tek satıcılık sözleşmeleri)” are not classified among the typical agreements explicitly regulated under the Turkish Code of Obligations (TCO). According to the Court of Cassation’s established case law and the prevailing view in doctrine, such relationships constitute sui generis, unnamed framework agreements that regulate the legal relationship between the producer (or importer) and the exclusive distributor, create ongoing obligations, and are distinctive in nature. Under such agreements, the producer allocates all or part of its products to the exclusive distributor for sale in a defined geographic area, and the distributor undertakes to sell the products on its own account while promoting and expanding the market. The content of the agreement, rather than its title, is decisive; even if parties label the agreement as a “dealership” or “sales-purchase protocol”, under TCO Article 19/1, courts will prioritise the parties’ actual and mutual intent over terminological labels.

The main distinguishing feature of exclusive distribution agreements compared to ordinary dealership arrangements is exclusivity. Exclusivity (münhasırlık) imposes a passive duty on the producer: not to establish alternative sales channels, directly or indirectly, within the designated territory. According to Court of Cassation decisions, unless the agreement explicitly allows the producer to sell directly, exclusivity is presumed. Therefore, the producer’s bypassing of the distributor to sell directly or appoint another distributor constitutes a material breach. Conversely, if the agreement expressly permits the producer to appoint other distributors or sell directly in the same territory, the relationship is considered an ordinary dealership rather than exclusive distribution. This distinction is crucial, particularly in terms of post-termination consequences and compensation claims.

Termination of exclusive distribution agreements and portfolio compensation

The most critical and dispute-prone stage in a distribution relationship is the moment of termination. Distributors who have invested in a brand for many years, built a customer portfolio, and expanded market share may face significant economic losses upon termination.

Under Article 122(5) of the Turkish Commercial Code (TCC), the portfolio compensation regime (denkleştirme istemi) provided for agents applies by analogy to distribution agreements. The legislature extended this protection to distributors due to the similarity of economic dependency and customer acquisition functions. To be entitled to portfolio compensation, the following conditions must be met:

• Termination of the Agreement: The agreement must have ended either through expiration or termination. However, if termination is due to the distributor’s fault or if the distributor terminates without just cause, no portfolio compensation is due.
• iAcquisition of New Customers: The distributor must have brought in new customers or significantly expanded the volume of existing customers, losing the benefits from these customers upon termination.
• Producer’s Continuing Benefit: The producer continues to derive significant benefits from the customer base even after the agreement ends.
• Equity: Compensation must be fair and reasonable under the circumstances of the case. Additionally, the amount of compensation cannot exceed the distributor’s average annual profit/commission over the last five years, which constitutes an upper limit. Adjustments to this limit may be considered depending on the facts and circumstances of the case.

A key procedural limitation is time: under TCC Art. 122(4), a claim for portfolio compensation must be brought within one year of the agreement’s termination. Court of Cassation case law treats this period as peremptory (hak düşürücü süre), and claims filed after the deadline are dismissed without consideration on the merits.

Can choosing foreign law eliminate the risk of portfolio compensation?

Recent case law indicates that the right to portfolio compensation is not considered a matter of public order. In practice, portfolio compensation claims under foreign-law distribution agreements are sometimes brought before Turkish courts. In such cases, whether the foreign law recognises portfolio compensation is decisive. If a valid foreign law is chosen, TCC Art. 122 does not apply. The Court of Cassation decisions include examples where foreign law selection was upheld, resulting in the dismissal of claims based on Turkish law for portfolio compensation.

In addition, under Turkish law, a distributor cannot waive portfolio compensation in advance, and clauses attempting such waivers are invalid. Conversely, if the chosen foreign law does not recognise portfolio compensation (eg, English law) or allows valid pre-waivers (eg, German law), the foreign law selection may mitigate portfolio compensation risks.

Conclusion

The entitlement to portfolio compensation upon the termination of distribution agreements is explicitly regulated by analogy to the provisions on agents under TCC Article 22. Under Turkish law, a distributor may be entitled to portfolio compensation if the legal requirements are met, including, among others, holding exclusive rights and not being at fault at the time of termination. Exclusivity is determined not only by the written terms of the agreement but also by the parties’ actual practices and commercial conduct. Furthermore, according to the case law of the Court of Cassation, portfolio compensation is not considered a matter of public order. Consequently, the governing law specified in the distribution agreement applies both to other post-termination compensation claims and to claims for portfolio compensation.

Finally, it should be noted that claims based on unfair competition under Articles 56 and 57 of the TCO are considered matters of public order. Accordingly, such claims arising from the termination of a distribution agreement fall within the jurisdiction of Turkish courts and are governed by Turkish law. Within this context, claims based on unfair competition may also arise, which should be carefully considered upon the termination of distribution agreements. Consequently, the relationship between the parties in distributorship arrangements should be carefully managed, with particular attention to pre-contractual agreements and the consequences arising from the termination of the agreement.