- Please note, the following statements are general in nature and do not constitute legal advise, there are omissions and there may be 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 -
AGENCY AND DISTRIBUTION AGREEMENTS under German law
A. AGENCY AGREEMENTS
1. Definition of 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.
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 not shorten it. If German is applicable and the commercial agent is performing its activities outside the territory of the European Union, exceptions apply.
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 recommendable.
The decision of the European Court of Justice in the case Semen v. Deutsche Tamoil from 26 March 2009 - C 348/07 - brought significant 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.
It remains to be seen whether new methods of calculating the indemnity of a commercial agent after termination of the agency contract need to established or the old set of rules for calculating indemnity established by the courts prior to the change in law may still be applied. First court decisions suggest that under certain circumstances the established method for calculating the indemnity may still be applied.
Apparently, this change in law has also a significant impact on agents that received a so called one time commission only (such as often in the procurement of newspaper subscriptions).
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 or franchise agreements.
The right to claim indemnity cannot be waived in advance. However, in an international setting the parties may stipulate the exclusion of said indemnification if certain 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 Introductory Law to the German Civil Code (in the following referred to as "EGBGB") implemented the respective provisions of the Rome Convention of 19 June 1980 on the law applicable to contractual obligations. However, depending on the date at which the agency contract is concluded, the agency contract is either governed by the (new) 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 the German EGBGB.
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).
According to the EGBGB / Art. 3 Rome I Regulation the parties to the contract may validly agree on the applicable law.
Art. 28 EGBGB respectively Art. 4 Rome I Regulation form the central rules as to the applicable law in the absence of choice.
Pursuant to Article 28 EGBGB, in case the parties have not chosen the law applicable to the contract, the law of the country with which it is most closely connected shall govern the contract.
Subject to the provisions of Article 28 paragraph 5 , Article 28 paragraph 2 EGBGB provides a presumption as to what country the contract is most closely connected. The EGBGB also applies in determining the applicable law with respect to agency agreements.
Pursuant to Art. 4 Rome I Regulation, however, 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.
5. Place of Jurisdiction
The general rule under German law provides that a dispute is subject to the jurisdiction of a German court where the defendant is domiciled or has his residency. In case the parties qualify as merchants or at least one party is domiciled outside Germany, derogation from a territorial jurisdiction can- subject to certain requirements - be stipulated.
Moreover, a German Court has jurisdiction on the basis of the criteria laid down by the Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters which has been ratified by all EU member States (except Denmark and parts of Cyprus). With reference to agency agreements, an additional criterion that may be used is set forth in Article 5 EUGVVO, the German statue which implemented the respective Article of the Council Regulation under which "a person domiciled in a Member State may, in another Member State, be sued in matters relating to a contract, in the courts of the place of performance of the obligation in question".
Moreover, Article 23 (1) of the Council Regulation sets forth further requirements.
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 modify the statutory obligation not to compete by agreement.
The parties may even agree on a (reasonable) post-contractual non-competition clause. In order to be enforceable, certain restrictions apply, e.g., the obligation to make compensation payments.
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 contractual obligations can usually be safeguarded by a liquidated damages penalty clause or even by a penalty clause.
B. DISTRIBUTION AGREEMENTS
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.
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.
2. The termination of distribution agreements
Under German law, agreements with an indefinite term can be terminated either without cause (termination under consideration of contractual and/or statutory periods of time) or for cause.
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 the German EGBGB; both laws also apply to distribution agreements.
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.
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 distributors acquires a claim for an indemnity, provided the relationship with the principal exceeds the usual seller-buyer relationship and further 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 if, e.g. 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 a German court where defendant is domiciled or has his residency. Derogation from a territorial jurisdiction can be stipulated, however some requirements apply.
An alternative is to stipulate arbitration proceedings (incl. place of arbitration), e.g. pursuant to the Arbitration Rules of the German Institution for Arbitration ("Schiedsgerichtsordnung der Deutschen Institution für Schiedsgerichtsbarkeit").
Oliver Reinhardt, LL.M.
Lawyer / Germany