Local distributors and commercial agentsDistribution structures
What distribution structures are available to a supplier?
Any conceivable distribution structure is available. Apart from manufacturing under a private label, trademark licensing and joint ventures, the following distribution structures are typically used:
- In-house sales force, allowing direct influence on employees and an easy margin calculation, but generally entails high labour cost (including social security).
- Self-employed commercial agents, who solicit customers and can (but do not have to) have the authority to conclude a contract on the supplier’s behalf. The supplier sells directly to the customers and bears the distribution risk, but may also control the margins. Contrary to employees, the agent’s remuneration (commission) can be exclusively profit-oriented (ie, remunerated only in case of successfully soliciting customers), and in relation to the turnover. Commercial agents have to provide detailed market reports. If the commercial agent acts in the European Union, protective agency law applies, including the indemnity claim (see questions 8 to 10).
- Distributors, who buy and sell the products on their own behalf. Consequently, they bear distribution risks, and, in return, gain profit from the difference between purchase and resale price, while suppliers’ margins are rather low. The distributor is obliged to market and distribute the supplier’s products, and to safeguard the supplier’s interests. Distributors are less protected than commercial agents (for exceptions, see question 8).
- Commission agents, who are midway between commercial agents and distributors. They sell products in their own name but for the supplier’s account. The supplier bears the sales risk, even if the commission agents have products in a consignment stock to which the supplier retains the title. The supplier can influence the commission agent without observing the strict antitrust law that applies to distributorship agreements.
- Franchisees, who buy and sell products on their own behalf. The franchisee acquires licences of intellectual property rights (trademarks and know-how) from the supplier (franchisor) for using and distributing the products or services. The franchisee is entitled and obliged to design its shop according to the franchisor’s concept and corporate design, and use the management- and system-specific know-how. In return, the franchisee pays royalties. The franchisor has, in the beginning, to disclose the key risks and issues for running the franchise, and subsequently often provides assistance on know-how and business.
What laws and government agencies regulate the relationship between a supplier and its distributor, agent or other representative? Are there industry self-regulatory constraints or other restrictions that may govern the distribution relationship?
Employment contracts with the in-house sales force are governed by sections 611 to 630 BGB and several laws on employees’ protection.
Agency contracts are governed by sections 84 to 92c HGB. The commercial agent is, like the employee, strongly protected, for example, by mandatory rules on:
- minimum notice periods (see question 9);
- commission payments (see question 32); and
- goodwill indemnity (see question 10).
Distributorship contracts are - as in most EU member states - not explicitly governed by statutory law. However, there is extensive case law, for example, on whether the supplier has to take back unsold products upon termination of the contract. Agency law applies by analogy if the distributor is:
- integrated into the supplier’s sales organisation; and
- obliged (due to agreement or factually) to forward customer data during or upon termination of the contract.
Further, distributorship contracts have to conform to antitrust law. Generally, the antitrust law of any affected market applies (article 6(3a) of the Rome II Regulation).
Franchise contracts are not explicitly governed by statutory law. They combine elements of licensing, sales and management of another’s affairs. Generally, agency law applies by analogy (see German Federal Court of Justice (BGH), decision of 17 July 2002).
Certain industry self-regulatory constraints exist, for example, in the automotive industry, where members of the European Automobile Manufacturers Association have agreed to a code of good practice.Contract termination
Are there any restrictions on a supplier’s right to terminate a distribution relationship without cause if permitted by contract? Is any specific cause required to terminate a distribution relationship? Do the answers differ for a decision not to renew the distribution relationship when the contract term expires?
The supplier’s right to terminate without cause is restricted. No restriction applies to a decision not to renew the distribution relationship when the contract term expires, unless antitrust law in rare cases demands continued delivery.
Agency agreements can be terminated without cause if contractually agreed. However, mandatory notice periods have to be complied with, staggered pursuant to the contractual term (similar to article 15 (2) Commercial Agency Directive): from one month in the first, two months in the second, three months in the third, fourth and fifth year to six months after five years (section 89(1) HGB). The notice periods cannot be shortened and, in case of extension, the supplier’s notice period must not be shorter than the agent’s (section 89(2) HGB). A cause is only required if the agreement is terminated without a notice period (section 89a HGB). Such reason exists if the terminating party cannot reasonably be expected to continue the relationship until ordinary termination (considering all circumstances of the single case and weighing the interests of both parties).
Distributor agreements with an indefinite term can be terminated (sections 314, 573, 620(2) and 723 BGB); the notice period depends, however, on the single case, considering also the distributor’s investments. For example, one-year periods have been accepted in automotive distribution (BGH, decision of 21 February 1995, Citroën). In rare cases, antitrust law may demand a renewal of the relationship.
Franchise agreements can be terminated according to agency law (mutatis mutandis). However, longer periods can apply in specific cases, for example, if the franchisee made considerable investments due to the supplier’s product.
Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
The commercial agent is entitled to indemnity if the agent has brought new customers or has significantly increased the business volume with existing customers, which results in benefits for the principal, and if such payment of indemnity is equitable under the given circumstances (section 89b HGB). Indemnity is calculated on basis of the commission earned during the past 12 months of activity, earned with new customers, and existing customers towards whom the agent has substantially increased the sales. Indemnity is capped to a maximum of the past five years’ average annual commission (section 89b(2) HGB). The claim cannot be waived before termination, but is excluded if the agent has not notified the principal within one year following termination. Indemnity is not payable if:
- the agent terminated the contract (unless justified by circumstances attributable to the principal or because of the agent’s age or illness);
- the principal has terminated the contract because of default attributable to the agent (which would justify immediate termination for cause); or
- the agent, with the principal’s agreement, assigns and transfers its rights and duties under the agency contract to another person.
Indemnity cannot be contracted out, unless the agent acts outside the EEA (section 92c HGB). This has been confirmed by the European Court of Justice in its latest ruling on the international scope of the Commercial Agency Directive (decision of 16 February 2017, Agro Foreign Trade & Agency Ltd/Petersime NV; cf. Rohrßen, ZVertriebsR 2017, 181 et seq). For details on the different levels of protection of commercial agents in various countries, see Rothermel, Internationales Kauf-, Liefer- und Vertriebsrecht, 2016, with country overviews in chapter H.
The distributor can claim indemnity only by analogue application of agency law (see question 8). The distributor’s indemnity can amount to the distributor’s average annual net margin. For a long time, it was disputed whether the distributor’s goodwill indemnity could be excluded under German law in advance when the distributor operates outside Germany, but within the EEA. The BGH has recently denied such exclusion, provided the preconditions for analogue application of agency law are given, arguing that agency law restrictions applied here as well by way of analogy, hence in the distributor’s favour (BGH, decision of 25 February 2016, Convection-reflow Soldering Systems).
The franchisee can likely claim indemnity based on analogue application of agency law, but this has not yet been ruled out (BGH, decision of 23 July 1997, Benetton). No indemnity, however, can be claimed where the franchise concerns anonymous bulk business and customers continue to be regular customers only de facto (BGH, decision of 5 February 2015).
The commission agent may also claim indemnity based on analogue application of agency law (BGH, decision of 21 July 2016, Thomas Philipps). The claim can probably be avoided, especially by excluding the commission agent’s obligation to transfer the customer base to the principal (for details, see Franke/Rohrßen, IHR 2017, 62-70).Transfer of rights or ownership
Will your jurisdiction enforce a distribution contract provision prohibiting the transfer of the distribution rights to the supplier’s products, all or part of the ownership of the distributor or agent, or the distributor or agent’s business to a third party?
A provision that prohibits the transfer of distribution rights will be enforced (section 399 BGB). Distribution rights are not assignable without the supplier’s consent if the supplier has a reasonable interest in the distributor’s or agent’s personal performance (sections 613 and 664 BGB).
A transfer of ownership (change of control) cannot be hindered. However, the distributor can agree not to transfer ownership, and, in case of breach, the supplier is entitled to damages, including, if possible, re-transfer of ownership (section 137 BGB). In addition, the parties could agree on a termination right in case of change of control.