Agency (regulations, duration, termination, indemnities – if any)
Instead of direct distribution (by setting up a branch, a subsidiary or via e-commerce), one can also distribute ones’ products and / or services indirectly. Indirect distribution especially includes agents, distributors, franchisees or commission agents.
Self-employed commercial agents solicit customers and can (but do not have to) have the authority to conclude a contract on supplier’s behalf. The supplier sells directly to end 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, i.e. 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 EU, protective agency law applies, including the indemnity claim.
An agent would be treated as a supplier’s employee if the agent does not act independently. An agent acts independently if the agent – according to the overall picture of contractual rules and factual activity – freely organizes his activities and working time (sec. 84 (1) 2 HGB). This goes mutatis mutandis for other types of distribution partners. The treatment as employee especially has the following consequences:
- employee protection, e.g. limited right of termination under Dismissal Protection Act;
- continued payment of salary during public holidays, illness and holidays;
- minimum wage under Minimum Wage Act of 11 August 2014;
- obligation to pay contributions to social security;
- income tax on salary;
- adherence to worker participation and collective bargaining agreements if applicable.
- exclusive competence of labour courts if the employee has, during the last 6 months of activity, earned an average amount which does not exceed EUR 1,000 per month.
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Agency contracts are governed by sec. 84–92c German Commercial Code (HGB). The commercial agent is, next to the employee, strongly protected, e.g. by mandatory rules on remuneration, minimum notice periods, and goodwill indemnity. As regards remuneration, the agent is entitled to
- “del credere commission” if the agent assumes liability for fulfilment of businesses (sec. 86b HGB);
- an advance on commission once the principal has performed its obligation (sec. 87a para. 1 HGB);
- accounting within maximum periods of three months (sec. 87c (1) HGB);
- commission irrespective of delivery and payment, unless the principal is not responsible for non-delivery (sec. 87a ( 3) HGB);
- request information, statements of account, an excerpt from the books, and inspection by an auditor (sec. 87c HGB).
These rules are mandatory and cannot be contracted out. Further details on the payment of commission (if not agreed otherwise) are set in sec. 86b et seq. HGB.
- check the customers’ creditworthiness,
- inform the supplier immediately about any business procured,
- keep confidential any information obtained during his activity, and
- abstain from acting for the supplier’s competitors.
Agency agreements can be terminated without cause if contractually agreed. However, mandatory notice periods have to be observed, staggered pursuant to the contractual term: from one month in the first year to six months after five years (sec. 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 one (sec. 89 (2) HGB). A cause is only required if the agreement is terminated without notice period (sec. 89a HGB). It is given 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).
The 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 (sec. 89b HGB). Indemnity is calculated on basis of the commission earned during the last 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 year’s average annual commission (sec. 89b 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 principle 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 EEA (sec. 92c HGB).
Antitrust law does generally not apply to the agent-relationship, provided that the principal bears the commercial and financial risks related to selling and purchasing the products or services (Guidelines on Vertical Restraints of 10/05/2010, para. 12 et seq., 18, 49). Therefore, suppliers can control the price for which they sell the products / services via agents. Special limits apply only to post-contractual non-compete-obligations if concluded before termination. They must be limited to a two-year-maximum, to the agent’s territory or customers, and to the contractual products or services. Further, they must be done in writing and delivered to the agent. The principal has to pay an indemnity for the non-compete obligation’s term (sec. 90a HGB).
Generally, the parties are free to choose the applicable law (art. 3 Rome-I-Regulation). If, however, all elements relevant for the choice of law are located in another country than that of the chosen law, the choice of law shall not prejudice the provisions which cannot be derogated from by agreement (art. 3 (3) and (4) Rome-I-Regulation).
Overriding mandatory provisions of the forum’s law cannot be avoided by choosing another law. The courts may also give effect to overriding mandatory provisions of the country where the contractual obligations have to be performed (cf. art. 9 Rome-I-Regulation). Overriding mandatory rules are especially most of the protective agency law provisions. If, therefore, the agent acts within the EU, the agent’s claim for goodwill indemnity (based on the EU Directive on self-employed commercial agents of 1986) can hardly be contracted out – even if the parties choose a foreign law (cf. European Court of Justice, decision of 09/11/2000 [“Ingmar”], concerning, however, the former Rome Convention on Law Applicable to Contractual Obligations of 1980). Arguments against applying the same principles under the Rome-I-Regulation exist, but there is yet no case law which favors such interpretation.
Generally, the parties are free to choose a court, especially if
- the other party resides in another EU Member State, and the parties have chosen the court(s) of a EU Member State (art. 25 Brussels-Ia-Regulation);
- the other party resides in Iceland, Switzerland or Norway, and the parties have chosen the courts of one of these States or Germany (art. 23 Lugano-II-Convention); or
- both parties are merchants, legal persons under public law, or special assets under public law, or the other party resides outside Germany (sec. 38 Code of Civil Procedure [“ZPO”]).
However, a choice of court or arbitration can hardly avoid overriding mandatory provisions, as ruled by the Higher Regional Court in Munich (decision of 17/05/2006), and confirmed by the BGH (decision of 05/09/2012).
Suppliers and distribution partners are free to use any means of dispute resolution, especially out-of-court-negotiation, mediation, arbitration, litigation. Restrictions exist only insofar as overriding mandatory provisions can hardly be avoided by means of dispute resolution (see above). Suppliers and distribution partners can expect fair treatment in German courts since the judges are well-trained, have been determined beforehand, and the parties are entitled to due process of law (art. 101, 103 German Constitution). Advantages of resolving disputes in Germany are (inter alia) that court rulings are quite foreseeable and that court proceedings are quite quick (8.2 months for proceedings in the district courts according to the latest statistics).
Distribution or Concession of sale
Distributors buy and sell 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 (exceptions: see below). The supplier is obliged to assist and take care of his distribution partner, subject, however, to the supplier’s economic freedom.
Distributorship contracts are – as in most EU member states – not explicitly regulated by statutory law. However, there is extensive case law, e.g. whether the supplier has to take back products unsold at termination of contract. Agency law applies by analogy if the distributor is:
- integrated into the supplier’s sales organization; and
- obliged (due to agreement or factually) to forward customer data during or at termination of contract.
Further, distributorship contracts have to conform to antitrust law. Generally, the antitrust law of any affected market applies (art. 6 (3a) Rome-II-Regulation). Agreements which aim at or result in restraints of competition are prohibited by antitrust law, namely by the German Act Against Restraints of Competition (“GWB”) andart. 101, 102 Treaty on the Functioning of the EU (“TFEU”). Unless agreements contain hardcore restrictions, asafe harbor is provided by the De Minimis Notice of 30/08/2014 and the Vertical Block Exemption Regulation no. 330/2010 [“VBER”]). Hardcore restrictions are generally prohibited, regardless of the parties’ market shares, especially price fixing, restricting the geographic areas or categories of customers, or cross-supplies between distributors within a selective distribution system. If one party’s market share exceeds 30%, any restriction of competition can only benefit from the individual exemption under the strict criteria of art. 101 (3) TFEU(“efficiency defense”). Here are the most relevant types of clauses.
As regards non-compete-obligations, they are enforceable if they conform to antitrust law:
- Such agreements between non-competitors are safe if each party’s market share does not exceed 15% on any relevant market affected. If one party’s market share exceeds 15%, but none exceeds 30%, a non-compete-obligation during the contractual term is valid if limited up to 5 years at most. Where products are sold on premises owned or leased by supplier from third parties, the five-year maximum does not apply. However, the non-compete obligation cannot exceed the term the buyer is occupying the premises.
- After the contractual term, a non-compete obligation where one party’s market share exceeds 15%, but none exceeds 30%, is valid if it is necessary to protect know-how transferred to the distributor, and if limited to competing products, the concrete distributor’s premises, and a 1-year-term.
A supplier can generally not fix a resale price or price level at which its distributors or franchisees resell (except for suppliers that manufacture newspapers, magazines and books, sec. 30 GWB). An agreement or behaviour that aims at establishing such resale price maintenance is treated as hardcore restriction and thereforegenerally void (cf. Guidelines on Vertical Restraints of 10/05/2010, para. 48, 223). By way of – rare – exception, the supplier can plead the efficiency defense (e.g. when introducing a new product or a coordinated short term low price campaign).
However, resale prices can be influenced by recommending resale prices or setting maximum resale prices:Recommending resale prices or setting maximum resale prices is exempt from antitrust law if the parties’ market shares do not exceed 30% (beyond, there is only room for the efficiency defense), and only if it does not result in a minimum or fixed sale price because of pressure or incentives from one party (art. 101 (1) TFEU andart. 4 (a) VBER).
Establishing a minimum advertised price policy is exempt if it works as mere recommendation. If, however, it results in minimum resale prices or a fixed or minimum price level, it can only be exempt under the efficiency defense.
By contrast, a supplier shall not announce not to deal with distributors or franchisees that do not follow its pricing policy because it will be treated as fixing the selling prices (see above).
Most-favored nation or most-favored customer clauses are those which specify that the supplier’s price to the distributor will be no higher than its lowest price to other customer. Such clauses are enforceable if agreed between non-competitors and if none of the parties’ market shares exceeds 30% (beyond, there is only room for the efficiency defense).
The distributor on its side can generally charge different prices to different customers because of freedom of contract. However, a seller
- may have to charge the same prices if it holds a dominant or similarly strong market position(sec. 19, 20 GWB and art. 102 TFEU);
- may generally not charge different prices on grounds of race or ethnic origin. The same goes ongrounds of sex, religion, disability, age or sexual orientation if the respective sales contract is typically concluded without or with low importance of the buyer’s person, especially in “bulk business”. An exception exists if different treatment is based on objective grounds, especially where it serves to avoid threats, prevent damage etc. (sec. 19, 20 Anti-Discrimination Act, “AGG”).
A supplier may not restrict the territory into which, or the customers to whom its distribution partner sells (art. 101 (1) b TFEU). Exempt are, however, restrictions of:
- active sales into the exclusive territory or an exclusive customer group reserved to the supplier or another distribution partner;
- sales to end users if the distribution partner operates at wholesale level;
- sales from members of a selective distribution system to unauthorised distributors in the system’s territory; and
- selling components, supplied for incorporation, to customers who would use them to manufacture the same kind of products (art. 4 (b) VBER).
Active sales mean actively approaching individual customers (e.g. by direct, unsolicited mail, e-mail, visits) or a customer group in a specific territory trough promotions specifically targeted at that group. Passive sales mean responding to unsolicited requests from individual customers, including general advertising which reaches customers in other exclusive territories or customer groups if done reasonably. This also applies to the internet: sales via webshops cannot be excluded. A supplier may only, however, require its distribution partner to fulfil certain quality standards, especially in selective distribution (Guidelines on Vertical Restraints of 10/05/2010, para. 51, 54).
At the end of the distribution chain, consumer protection laws apply, namely between the seller and the buying consumer. Statutory law grants a 2-year-warranty that products are free from defects at the passing of risk. In case of defect, the buyer is entitled to claim subsequent performance (remedy of defect or delivery of a defect-free product), alternatively price reduction or withdrawal (all regardless of fault), and, damages, provided that the seller has acted with fault (sec. 437, 280 et seq. BGB). Though fault is generally assumed by law, the seller can exculpate itself, especially if the seller has not manufactured the good (but its sub-supplier). Towards consumers, these rights cannot be contracted out (sec. 474, 475 BGB). Each seller within the distribution chain is entitled to have recourse against its own supplier if the product has already been defective at the respective delivery (sec. 478, 479 BGB). In order to maintain these rights, however, the buyer (unless consumer) already has to check at delivery if products are defective, and inform the seller accordingly (sec. 377, 378 HGB).
Besides, special information duties towards consumers exist in:
- over the phone sales (sec. 312a (1) BGB);
- over-the-counter sales, except everyday sales (sec. 312a (2) 2 BGB, art. 246 (2) EGBGB);
- e-commerce (sec. 312j BGB); and
- direct distribution off-premises and distance contracts (sec. 312d BGB).
Statutory law also limits the fees which the consumer shall pay beyond for means of payment or consumer hotlines etc. (sec. 312a (3–5) BGB). Finally, the consumer has a right of withdrawal regarding distance and off-premises contracts (sec. 312g, 355 BGB).
A supplier may limit the warranty rights granted by statutory law towards its distribution partners. In general, there are few limits to individual agreements: they must not contradict statutory prohibitions (sec. 134 BGB) and public policy (sec. 138 BGB), and must not limit or exclude liability for willful intent, fraudulently concealing defects, where a guarantee has been given, or according to product liability law (sec. 202, 276, 444, 639 BGB). If the product has been found defective at the consumer, and the defect has already been existing between the distribution partners, a limitation of warranty can only be enforced if the supplier provides another compensation of equal value (sec. 478 (4) BGB).
In standard business terms, however, one may hardly deviate from statutory law – even in B2B-contracts (sec. 310 (1) and 307 BGB). One may only
- modify the rules of subsequent performance (time, place, number of attempts);
- exclude liability for slightly negligent breaches of non-cardinal duties; and
- limit liability for slightly negligent breaches of cardinal duties to the typical damages foreseeable at conclusion of contract.
The same goes for warranties provided to each downstream customer, unless the customer is a consumer because a consumer’s statutory rights cannot be contracted out.As regards product recalls, statutory law does not set any requirements. According to case law, a manufacturer must keep its products under surveillance and, when detecting risks for legally protected goods (as health), adopt the necessary preventive measures.Extent and time of such measures depends on the single case, especially the good at risk and the extent of possible damage (BGH, decision of 16/12/2008). Distribution agreements can delineate which party isresponsible for a recall and its costs. Individual agreements are not subject to specific limits. Standard business terms, however, are subject to a strict review in court: they can be unenforceable if they are incompatible with essential statutory principles, if they limit essential contractual rights and duties, if they are surprising or ambiguous (sec. 310 (1), 307, 305c BGB). Therefore, such terms should consider who would typically be responsible for recall and costs, depending on the product (ready-made, or not, etc.).
Distributor agreements with indefinite term can be terminated (sec. 314, 573, 620 (2), 723 BGB); the notice period depends, however, on the single case, considering also the distributor’s investments. E.g., one-year periods have been accepted in automotive distribution (BGH, decision of 21/02/1995 [Citroën]). In rare cases, antitrust law may demand a renewal of the relationship.
The distributor can claim indemnity only by analogue application of agency law (see above). The distributor’s indemnity can amount to the distributor’s average annual net margin.As regards applicable law / choice of lawand details on dispute resolution (choice of court, choice of arbitration / mediation), please see above in the section on agents.
Franchisees 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-/system-specific know-how. In return, the franchisee pays royalties. The franchisor is precontractually obliged to disclose the key risks and issues for running the franchise, and subsequently often provides assistance on know-how and business.
Franchise contracts are not explicitly governed by statutory law (unlike e.g. in Italy). They combine elements of licensing, sales, and management of another’s affairs. Generally, agency law applies by analogy (cf. German Federal Court of Justice [“BGH”], decision of 17/07/2002).
Within franchisee relationships, the same antitrust rules apply as within distributor relationships: generally, agreements which aim at or result in restraints of competition are prohibited by antitrust law, namely by the German Act Against Restraints of Competition (“GWB”) and art. 101, 102 Treaty on the Functioning of the EU (“TFEU”). For details, please see above in the section on distributors.
Franchise agreements can be terminated according to agency law (mutatis mutandis). However, longer periods can apply in the specific case, e.g. if the franchisee made considerable investments due to the supplier’s product.
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).
If a company owns a brand or design, such trademark owner can also distribute the product or service bygranting a trademark license to another party (“licensee”). By way of such license agreement, the trademark owner (“licensor”) allows the licensee to make use of its trademark.
The license agreement should especially cover:
- the trademark;
- the goods and/or services which the licensee is entitled to offer under the trademark and details on the use of the trademark (with or on the goods and/or services, promotion material);
- the territory where the licensee is entitled to use the trademark;
- any exclusivity of the license (if applicable);
- royalty (in return for the license);
- quality control (e.g. approval of samples prior to mass production and audit rights as regards the licensee’s facilities, the raw materials used and the final products);
- the license’s term; and
the usual boilerplate clauses (written form, no waiver, severability, choice of law, choice of court etc.).
Selling via e-commerce (required licences, if any)
Selling via e-commerce does not require special licenses in Germany. However, certain requirements have to be observed as regards the webshop, especially providing clearly
- the basic information about the entity behind the webshop (“Contact“, “Imprint” or “Legal Notes”);
- the terms and conditions of sale; and
Relevant anti-trust regulations
According to the effects doctrine, the antitrust law of any affected market applies (art. 6 (3a) Rome-II-Regulation). Within the European Economic Area (“EEA”), Agreements which aim at or result in restraints of competition are prohibited by antitrust law, namely by art. 101, 102 Treaty on the Functioning of the EU (“TFEU”) and in Germany also by the German Act Against Restraints of Competition (“GWB”). Unlessagreements contain hardcore restrictions, a safe harbor is provided by the De Minimis Notice of 30/08/2014 and the Vertical Block Exemption Regulation no. 330/2010 [“VBER”]). Hardcore restrictions are generally prohibited, regardless of the parties’ market shares, especially price fixing, restricting the geographic areas or categories of customers, or cross-supplies between distributors within a selective distribution system.
Details are explained above with each kind of distribution channel.