Local distributors and commercial agents
What alternative distribution relationships are available to a supplier?
Any conceivable distribution relationship is available. The following distribution relationships are typically used.
- In-house sales force, which allows for direct influence on employees and an easy margin calculation but generally entails high labour cost (including social security).
- Self-employed commercial agents, who sell the products on the supplier’s behalf. The supplier keeps direct contact with and sells directly to the customers, with a higher control over the activities of the agent and over the margins. Commercial agents have to provide detailed market reports. Unlike an employee’s salary, an agent’s commission can be exclusively profit-oriented (namely subject to successfully soliciting customers) and linked to the turnover. Within the EU, protective agency law applies, including minimum termination notice and indemnity provisions.
- Distributors, who buy and, thus, take ownership of the products and sell them on their own behalf, adding a margin to cover their own costs. They assume liability and, in return, gain profit from the margin, while the suppliers’ margins are rather low. The distributor is obliged and motivated to market and distribute the products he or she purchases from the supplier and to safeguard the latter’s interests. Distributors are subject to limited control by the supplier over their activities but are also less protected than commercial agents.
- 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 like distributors buy and sell products on their own behalf. A franchisee is entitled and encouraged to use the franchisor’s trade name, trademarks, know-how and brands, based on the acquired licences of intellectual property rights, to market and sell the goods or services. Franchisors are typically already established within the marketplace, often already with a solid customer base. In return, the franchisee usually pays an initial fee and ongoing royalties. The franchisor, based on the experience acquired with the established business, has to disclose the key risks and issues linked to the franchise and often provides assistance and guidelines in the marketing and selling of the goods or services to maintain the brand identity.
- Private label products: these are products produced by the supplier under the trademarks of the retailer (in contrast to manufacturer brands).
- Trademark licences: these are especially used where the trademark owner has already introduced well-known brands but does not have its own manufacturing capacities or knowledge. To enter into a new product market, the licensor can grant licensees, who have the necessary technical and commercial know-how, a licence to produce and sell the products under the licensor’s trademark. The agreement usually, but not necessarily, grants an exclusive licence for a certain territory, and it requires maintaining product quality and upholding the brand image.
- Joint ventures: these are joint projects between legally and economically independent companies in which the partners share management responsibility and financial risk. The setting up of a joint venture is based on a common interest of the partner companies that is expressed in a joint venture agreement, which also regulates the distribution of profits and joint control.
- Concession agreements: these aim to sell the supplier’s products within sales areas in department stores, operated by the supplier, typically using the department store’s payment system.
Legislation and regulators
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 of the German Civil Code (BGB) and several laws on employees’ protection.
Agency contracts are governed by sections 84 to 92c of the German Commercial Code (HGB). The commercial agent is, like the employee, strongly protected, for example, by mandatory rules on minimum notice periods, commission payments and goodwill indemnity.
Most EU member state’s laws do not expressly regulate distributorship contracts. However, the legal vacuum was mostly filled by case law, for example, with respect to the supplier’s duty to take back unsold stock upon termination of the contract. German agency law applies by analogy to the distributor if the latter is (1) integrated into the supplier’s sales organisation and (2) obliged (contractually or factually) to submit the customer data during or upon termination of the contract.
Antitrust law also applies to distributorship contracts. Pursuant to article 6 (3a) of the Rome II Regulation, the antitrust regulation of any affected market must be complied with.
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 the German Federal Court of Justice (BGH), decisions of 12 November 1986, on mineral water, and 17 July 2002, Hertz). Moreover, being standard form contracts (pre-formulated and provided by the franchisor for multiple franchisees), franchise contracts have to comply with the quite strict German laws on standard form contracts (BGH, decision of 11 October 2018, RE/MAX; comment by Rohrßen, ZVertriebsR 2019, 325).
Industry self-regulatory constraints
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, stipulating minimum notice periods and methods for the resolution of contractual disputes.
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.
The principal and the agent’s right to terminate the agency agreement without cause can be contractually agreed upon. However, there are mandatory notice periods to observe, in accordance with section 89(1) of the HGB, depending on the contractual term (similarly to article 15(2) of the Commercial Agency Directive): the period is one month in the first year, two months in the second year, three months in the third, fourth and fifth year and six months after five years. The notice periods are set by law and cannot be shortened. In the event of contractual extension, the supplier’s notice period cannot be shorter than the agent’s (section 89(2) HGB). The agreement can be terminated without a notice period only if there is cause (section 89a HGB), and the terminating party cannot reasonably be expected to carry on the contractual relationship until its ordinary termination (taking into account all circumstances of the single case and weighing the interests of both parties).
If a contract term was not agreed upon, a distributorship agreement can be terminated (sections 314, 573, 620(2) and 723 BGB). The length of the notice period depends on the case, considering also the distributor’s investments. For example, one-year periods were deemed suitable in the automotive sector (BGH, decision of 21 February 1995, Citroën). In rare cases, a renewal of the relationship may be imposed by antitrust law.
Generally, agency law applies to the termination of franchise agreements (mutatis mutandis). However, longer periods may be deemed necessary in specific cases, for example, if the supplier’s product forced the franchisee to make considerable investments.
Is any mandatory compensation or indemnity required to be paid in the event of a termination without cause or otherwise?
A commercial agent can claim indemnity if he or she has brought new customers or has significantly increased the business volume with already existing customers, resulting in benefits for the supplier, and if the payment of indemnity can be deemed equitable in the specific case (section 89b HGB). The relevant calculation is based on the commissions earned over the previous 12 months of activity, both with new customers and existing customers with whom the agent has substantially increased the business. The indemnity cannot exceed an amount equal to the past five years’ average annual commission (section 89b(2) HGB). The indemnity claim cannot be waived before termination. To retain the indemnity, the commercial agent needs to notify the principal within one year from termination; otherwise, he or she loses the right to indemnity. Indemnity is not due if:
- the agent terminates the contract (unless owing to circumstances attributable to the principal or because of the agent’s advanced age or illness);
- the principal terminates the contract owing to default attributable to the agent (which would justify immediate termination for cause); or
- the agent, upon agreement with the principal, assigns and transfers its rights and duties under the agency contract to a third person.
The right to indemnity cannot be excluded by the parties, unless the agent acts outside the European Economic Area (EEA) (section 92c HGB). This has been confirmed by the European Court of Justice in its 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 (2021), with overviews of 65 countries in Chapter H.
Distributors can claim indemnity only by analogic application of agency law. A distributor’s indemnity can amount to its average annual net margin. For a long time, it was disputed whether a 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 analogic application of agency law are given, arguing that agency law restrictions applied to distributorships as well by way of analogy, and hence in the distributor’s favour (BGH, decision of 25 February 2016, Convection-reflow Soldering Systems).
Franchisees can likely claim indemnity based on analogic application of agency law, but this has not yet been ruled out (BGH, decision of 23 July 1997, Benetton). The Federal Court of Justice has denied the franchisee’s indemnity claim in the single case, but it would quite likely affirm it in the case of distribution franchising, where the franchisee buys the products from the franchisor, arguing that where the franchisee has been entrusted with the distribution of the franchisor’s products and, after termination of the contractual relationship, the franchisor alone is entitled to the customers newly acquired by the franchisee during the term of the contract, the situation is similar to distributorship and commercial agency situations (BGH, decision of 29 April 2010, Case No. I ZR 3/09, Joop). However, no indemnity can be claimed where the franchise concerns anonymous bulk business and customers continue to be regular customers on a de facto basis (BGH, decision of 5 February 2015) or production franchising (bottling contracts, etc) where the franchisor or licensor is not active in the sector of products distributed by the franchisee or licensee (Joop).
Commission agents may also claim indemnity based on analogic application of agency law (BGH, decision of 21 July 2016, Thomas Philipps). The claim can probably be avoided, in particular by excluding the commission agent’s obligation to transfer the customer base to the principal (for details, see Franke and Rohrßen, IHR 2017, 62–70).
Transfer of rights or ownership
Will your jurisdiction enforce a distribution contract provision prohibiting or restricting 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 the event of a breach, the supplier is entitled to damages, including, if possible, retransfer of ownership (section 137 BGB). In addition, the parties can agree on a termination right in the case of change of control.
Law stated date
Correct as of
Give the date on which the information above is accurate.
21 January 2021.