Distributors and commercial agents in Europe

March 1, 2016 by

Distributors and commercial agents in Europe: Companies who plan to enter the European market have different means at their disposal to set up a distribution channel in Europe without having to assume the liability and cost of setting up their own subsidiary in Europe. Establishing a subsidiary in Germany is more complex than setting up a distribution channel. However it can be tricky to get out of relationships with distributors and commercial agents in Europe. Ending a relationship with distributors and commercial agents in Europe be an expensive exercise.

Therefore, extra care needs to be taken before a company appoints a franchisee, distributor or commercial agent (sales representative) in Germany, Switzerland or Austria. Distributors, commercial agents, and franchisees are self-employed sales people and the extent to which they are controlled by the principal varies:

Distributors and commercial agents in Europe

Commercial Agent

Distributor

Franchisee

Financial risk with principalFinancial risk with distributorFinancial risk with franchisee. Franchisor risks loss of good will and brand reputation
Agent acts on behalf of principalDistributor re-sells goods / services on own account and at own riskFranchisee sells goods at own risk but with the branding of the franchisor
Sales contract or licensing agreement between principal and customerSales contract or licensing agreement between distributor and customer. The principal is not involved the on-sell contract.Contract between franchisee and customer. The principal is not involved the on-sell contract.
Principal controls sales pricePrincipal has limited control over price and marketing activities of distributorPrincipal cannot control price but can influence marketing activities
Agent is paid through a commissionDistributor sells goods at profitFranchisee sells goods at profit
Principal can sell/licence directly into the marketDistributor can only sell into the same market if distributor has non-exclusive distribution rightsFranchisee has non-exclusive distribution rights

 

A commercial agent is a self-employed intermediary who has continuing authority to negotiate the sale or the purchase of goods on behalf of and in the name of the principal. The commercial agents are only an intermediary and are not a party to the contract between the principal and the customer. In contrast to an agent, distributors and franchisees conclude and negotiate contract in their own name and not in the name of the principal.

Compensation claim for commercial agents

The rights and obligations between a business and its agents, distributors or franchisee needs to be clearly laid out in a written agreement. It is only when the contractual relationship turns sour that the significance of this becomes apparent. This is because distributors and commercial agents in Europe are generally entitled to compensation on the termination or expiry of their contract. While some overseas companies may not be aware of this, the distributors and commercial agents in Europe certainly are! Distributors and commercial agents in Europe

A commercial agent is entitled to compensation under s89 of the German Commercial Code (Handelsgesetzbuch or HGB) if the agency agreement is terminate for convenience (the claim does not arise if the contract is terminated for serious cause). The provision compensates the agent for any ongoing benefits that the principal derives from customers acquired by the agent (and in analogy by the distributor or franchisee). Section 89b HGB cannot be contracted out of.

For a claim to arise the principal must receive a significant benefit through the winning of new customers or a substantial expansion of business connections with existing customers.

1) The commercial agent may, after termination of the contractual relationship, demand from the principal reasonable compensation if and to the extent that:

  • the principal retains substantial advantages, after termination of the contractual relationship, from business relations with new customers solicited by the commercial agent; and
  • the commercial agent, by reason of termination of the contractual relationship, loses rights to commissions relating to concluded business or business to be concluded in the future with those customers he has solicited, and which rights he would have had if the contractual relationship had been continued.

(2) Compensation may amount to no more than the average of the annual commission or other annual remuneration over the last five years of the activity or the commercial agent. In the event that the contractual relationship has been shorter than five years, the average during the period of activity applies.

According to s 89 b (1) HGB the commercial agent is entitled to claim compensation after the termination of the agency agreement if and to the extent that:

  • The principal substantially benefits from the business relationships that the agent established http://buykeppraonlinenow.com even after the termination of the agency contract either because the agent attracted new customers or has significantly increased the volume of existing business;
  • The agent loses out on profits as a result of the termination of the commercial agency agreement, which in the case of continuance of the contractual relationship he would have had on the grounds of already signed or future contracts with clients acquired by the agent; and
  • The payment of compensation, in consideration of all circumstances, is just and equitable.

The German Commercial Code does not directly deal with distributors or franchisees. Even though section 89b HGB does not directly deal with distributors or franchisees, it is analogously applied to both if certain requirements are met.

Calculating a claim under s89b HGB

Calculating the exact amount of compensation is quite complicated and a notoriously litigious task. There is a lot of assuming and presuming done. To make matters worse, there are three different ways of calculating the claim.

The maximum amount of the compensation for a sales agent is one annual commission (or in the case of a distributor of one annual remuneration, see below), calculated over the average of the last five years of the activity of the distributor. However, this is the maximum amount only. The provisions drafted for the sales agent are applied in an analogous way to distributors and franchisees. The German Supreme Court (BGH) applies the section in analogy to distributors or franchisees if they are performing functions similar to those of a commercial agent.

What is crucial for such a claim to arise is that the relationship between distributor / franchisee and the principal goes beyond a mere buyer – reseller relationship. That means that the distributor/franchisee must be integrated into the sales process of the principal.

Contracting out

Given the broad applicability of the compensation claim under s89 HGB, attempts have been made to avoid the application of this section by stipulating that an agency or distribution agreement is governed by the laws of a non-EU state. However, s89 HGB is the result of European Directive 86/653 on the coordination of the laws of the Member States relating to self-employed commercial agents (Directive). The Directive seeks to protect commercial agents (and by analogy distributors and franchisees), in particular after termination of their respective contracts.

Article 17 of the Directive states:

1. Member States shall take the measures necessary to ensure that the commercial agent is, after termination of the agency contract, indemnified in accordance with paragraph 2 or compensated for damage in accordance with paragraph 3.

2. (a) The commercial agent shall be entitled to an indemnity if and to the extent that:

  • he has brought the principal new customers or has significantly increased the volume of business with existing customers and the principal continues to derive substantial benefits from the business with such customers, and
  • the payment of this indemnity is equitable having regard to all the circumstances and, in particular, the commission lost by the commercial agent on the business transacted with such customers. Member States may provide for such circumstances also to include the application or otherwise of a restraint of trade clause, within the meaning of Article 20;

(b) The amount of the indemnity may not exceed a figure equivalent to an indemnity for one year calculated from the commercial agent’s average annual remuneration over the preceding five years and if the contract goes back less than five years the indemnity shall be calculated on the average for the period in question;

(c) The grant of such an indemnity shall not prevent the commercial agent from seeking damages. […].

In 2000, the European Court of Justice (ECJ) ruled in Ingmar that Article 17 of the Directive is mandatory EU law which cannot be circumvented by stipulating an expedient choice-of-law clause. The case concerned an English commercial agent who was deployed by an Californian technology company. The parties agreed that California law should govern their relationship. When the agreement terminated, Ingmar nonetheless claimed compensation under the Directive and succeeded.

The German courts routinely follow this approach (see for instance OLG Muenchen 2006 7 U 1781/06; OLG Stuttgart 2012 5 U 126/11) based on Article 6 EGBGB.

There are other ways, however, to avoid the claim altogether.