Agency and Distribution Agreements German Law

– Please note, the following statements are general in nature and do not constitute legal advice. A thorough or comprehensive overview would require a whole textbook. Hence, there are omissions and there may be unintended errors, new legislation passed or different court holdings may have been handed down in the meantime. Additionally, each case is different and you may therefore not rely on the following statements. If you seek or need legal advice, please consult us or any other competent lawyer of your choice –

A. AGENCY AGREEMENTS German Law

1. Definition of an agent under the German Commercial Code

A commercial agent under Articles 84 et seq. of the German Commercial Code („Handelsgesetzbuch“ – HGB) is defined as a self-employed intermediary who has continuing authority to procure orders or conclude contracts in the name and at risk of one or more principals.

The distinctive feature of an agency agreement is set forth in Article 87 of the German Commercial Code according to which the agent is entitled to a commission after conclusion of a contract between his principal and a third party by virtue of his intervention, or with third parties which the agent has acquired as customers for transactions of the same kind.

Please note, German agency law is largely governed by statutory provisions. While the parties are generally free to agree on different terms, there are some provisions that are mandatory, and conflicting contractual provisions may be invalid. Nevertheless, if German law is applicable and the commercial agent is performing its activities under the contract outside the territory of the European Community or of the contracting states of the European Economic Area Agreement, special rules apply.

The European Court of Justice held in a different setting, that Articles 17 and 18 of the Directive, which guarantee certain rights to commercial agents after termination of agency contracts, must be applied where the commercial agent carried on his activity in a Member State although the principal is established in a non-member country and a clause of the contract stipulates that the contract is to be governed by the law of that country (European Court of Justice, Ingmar GB Ltd v. Eaton Leonard Technologies Inc., Case C-381/98, 9 November 2000). In the case, plaintiff has been the commercial agent in the United Kingdom (before Brexit) of a company established in California. The contract between the parties stipulated that it was governed by Californian law, was terminated by the principal without commission being paid to the agent.

Please note, unless otherwise indicated, the following remarks assume that German law is applicable and the commercial agent or distributor carries on its activities in Germany.

2. Termination of agency agreements

The German Commercial Code provides for an agency agreement with an indefinite term that either party may terminate the agreement by giving to the other a prior notice of the termination. The period of notice depends on the duration of the contract. Unless otherwise agreed by the parties, any termination is valid only to the end of a calendar month. The parties may agree on a longer notice period as provided for by the German Commercial Code but may generally not shorten it.

3. Indemnity payable to the agent upon termination of the agreement

The commercial agent is entitled to an indemnity at the end of the agreement pursuant to Article 89b of the German Commercial Code, which complies with EC Directive 86/653/EEC on the harmonization of legislation of EU member States for independent commercial agents if certain requirements are met. E.g. if the commercial agent has generated new customers for the principal’s business, or has significantly increased the extent of business with already existing customers and the principal continues to derive substantial benefits from business with said customers.

Under certain circumstances the commercial agent is not entitled to an indemnity, e.g. if the contract is terminated for cause due to culpable conduct of the commercial agent or if the commercial agent terminates the agency agreement neither justified by age or health reasons nor by the behavior of the principal.

Calculation of the indemnity is complex and lawyer’s advice is highly recommended. Especially since various deadlines must also be observed. 

The decision of the European Court of Justice in the case Semen v. Deutsche Tamoil from 26 March 2009 – C 348/07 – brought changes as to the method for calculating the indemnity of a commercial agent after termination of the agency contract under German Law.

The old version of Paragraph 89b (1) of the German Commercial Code (Handelsgesetzbuch), in force at the time of the decision of the European Court of Justice, provided, inter alia, that a commercial agent may demand a reasonable indemnity after termination of the agency contract from the principal, if and to the extent that:

„the commercial agent, by reason of the termination of the agency contract, loses rights to commission from business already transacted, and business to be transacted in the future, with customers he has brought, which he would have been entitled to if the agency agreement had remained in place; and…“

The court held that in the light of Article 17(2)(a) of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents, it is not possible automatically to limit the indemnity to which a commercial agent is entitled by the amount of commission lost as a result of the termination of the agency contract, even though the benefits which the principal continues to derive have to be given a higher monetary value.

As a reaction to this decision, the German legislature amended Paragraph 89b (1) of the German Commercial Code in August 2009. As a consequence, under German national law commission lost became only one of several elements relevant to determining whether the amount of indemnity is equitable.

Apparently, this change in law has also an impact on agents that received a so called one time commission only (such as often in the procurement of newspaper subscriptions).

Nevertheless, it`s still commonplace to calculate the amount of indemnity based on the established old set of rules prior to the change in law. Otherwise, it´s highly complicated and not yet settled as to how to calculate the benefits which the principal continues to derive.

It should also be noted, that if certain requirements are met, Paragraph 89b of the German Commercial Code (Handelsgesetzbuch / HGB) may apply analogously in case of termination of certain distributor agreements.

The right to claim indemnity cannot be waived in advance. However, in specific international settings, the parties may stipulate the exclusion of said indemnity if certain conditions and requirements are met.

The indemnity does not exclude the commercial agent from claiming compensation for damages based on other causes of action.

4. Governing law on agency agreements concluded with foreign commercial agents / conflicts of laws

The applicable law to contractual obligations is governed by the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I).

It should be noted that non-contractual obligations are addressed by the Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II).

Art. 28 Rome I Regulation provides that the “… Regulation shall apply to contracts concluded after 17 December 2009”. Please note clarification notice in Official Journal of the European Union L 309/87 from November 24, 2009:

On page  16,  Article  28,  ‘Application  in  time’:

for: ‘This  Regulation  shall  apply  to  contracts  concluded  after  17  December  2009.’,

read:    ‘This  Regulation  shall  apply  to  contracts  concluded  as  from  17  December  2009.’

Contracts concluded prior to that date, are governed by a different set of rules. If a contract is concluded before the application date, but subsequently a variation is agreed between the parties, the application of the Rome I Regulation depends on the facts of the case.

According to Art. 3 Rome I Regulation, the parties to the contract may validly agree on the applicable law.

Art. 4 Rome I Regulation forms the central rule as to the applicable law in the absence of choice. Pursuant to Art. 4 para. 1 Rome I Regulation, agency agreements shall be generally governed in the absence of a choice of law by the law of the country where the agent has his habitual residence. Please note, there may be exceptions, e.g.:

Art. 4 para. 3.   Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply.

Art. 4 para. 4.   Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.

The general rule under German law provides that a dispute is subject to the jurisdiction of the court where the defendant is domiciled or has his residency. If certain requirements are met, derogation from a territorial jurisdiction can be stipulated.

Under certain circumstances it also may be possible to sue before the courts of the place of performance of the obligation in question.

The question where to litigate is always a key issue to decide in an international setting. What are the costs of litigation in a specific country, which law could that court apply, is a decision of a court in one country enforceable in the country of the defendant? These and other questions must be addressed before filing a law suit.

5. Miscellaneous

Sometimes issues concerning covenants not to compete (non-competition clauses) give rise to dispute. Under German law, an agent is generally prevented from competing during the term of the agreement. Occasionally, the parties may modify the statutory obligation not to compete by agreement.

The parties may even agree on a (reasonable, no longer than a certain period of time) post-contractual non-competition clause. In order to be enforceable, certain restrictions and requirements as to form, length and content apply.

The principal may additionally wish to protect intellectual property rights, trade secrets, customer relations or know how by specific contract provisions.

Pursuant to German law, compliance with a covenant not to compete can usually be safeguarded by a liquidated damages penalty clause or even by a penalty clause; in both cases certain requirements must be observed.

About The Firm

B. DISTRIBUTION AGREEMENTS German Law

1. Juridical qualification of distribution agreements under German law

Although the German Civil and Commercial Codes regulate several kinds of marketing agreements (such as agency contracts), distribution agreements do not have statutory discipline in Germany. There are minor exemptions, e.g., regarding the applicable law.

A distribution agreement may broadly be described as a framework agreement by which the distributor undertakes as an independent business to sell goods and renders services (such as to promote the goods) in distributor’s own name and for distributor’s own account in a defined territory on a regular basis.

The distinctive feature of a distribution agreement is that the distributor buys goods at a discounted rate from its principal prior of selling the goods in the territory in distributor’s own name and for distributor’s own account.

Due to the lack of statutory guidance, the juridical qualification of a distribution agreement under German law can be difficult and, de facto, must be carried out on a case-by-case basis.

Please also note, under German law, the distribution agreement must be (legally) distinguished from the single transaction, i.e. the single sales contracts between the distributor and the principal. The remarks here, refer to the distribution agreement only.

2. The termination of distribution agreements

Under German law, agreements with an indefinite term can be terminated either without cause or for cause. Since there are no statutory provisions governing the period of notice, the decision must be made case-by-case.   

3. Law applicable to distribution agreements / conflict of laws

Depending on the date at which the distribution contract is concluded, the distribution contract is governed by the Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) or by another set of rules.

If the Rom I Regulation applies, Art. 4 1.(f) specifically provides, that in the absence of choice the distribution contract shall generally be governed by the law of the country where the distributor has his habitual residence. The parties to the contract may also agree on the applicable law.

The basic principle and some exemptions as to the applicable law are described in more detail above re. commercial agents.

4. Indemnity payable to the distributor upon termination of the agreement

Article 89b of the German Commercial Code (Handelsgesetzbuch / HGB) is analogously applied to distributors if certain requirements are met. Hence, upon termination of the distribution agreement, the distributor may acquire a claim for an indemnity, provided the relationship with the principal exceeds the usual seller-buyer relationship and further conditions and requirements are satisfied, e.g. the payment of indemnity is just and equitable having regard to all the circumstances.

Under certain circumstances the distributor is not entitled to an indemnity for other reasons, e.g. if the contract is terminated for cause due to culpable conduct of the distributor.

Calculation of the indemnity is complex and lawyer’s advice is recommendable.

The payment of the indemnity does not deprive the distributor from claiming compensation for damages based on other causes of action.

5. Place of Jurisdiction

The general rule under German law provides that a dispute is subject to the jurisdiction of the court where defendant is domiciled or has his residency. Derogation from a territorial jurisdiction can be stipulated, however some requirements and restrictions apply.

The principal may additionally wish to protect intellectual property rights, trade secrets, customer relations or know how by specific contract provisions.

Pursuant to German law, compliance with a covenant not to compete can usually be safeguarded by a liquidated damages penalty clause or even by a penalty clause; in both cases certain requirements must be observed.

The general rule under German law provides that a dispute is subject to the jurisdiction of the court where defendant is domiciled or has his residency. Derogation from a territorial jurisdiction can be stipulated, however some requirements and restrictions apply.

The principal may additionally wish to protect intellectual property rights, trade secrets, customer relations or know how by specific contract provisions.

Pursuant to German law, compliance with a covenant not to compete can usually be safeguarded by a liquidated damages penalty clause or even by a penalty clause; in both cases certain requirements must be observed.

Oliver Reinhardt, LL.M.

Rechtsanwalt / Attorney Germany

Distribution Law Germany

Contact:

Rechtsanwalt Oliver Reinhardt, LL.M.
Bildungscampus 3
74076 Heilbronn
Germany

Tel.: +49 (0)7131-7669-620
E-Mail: mail@reinhardt-legal.de

+49 (0)7131-7669-620